By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
Paul Krugman has a thing where you know what his column will look like on Monday based on what goes on his blog that Friday. Sure enough, he transformed this blog post on the Government Accountability Office’s report on too big to fail into this column yesterday with the humble title “Dodd-Frank Financial Reform is Working.”
I pretty much called the reaction to the GAO’s report Friday, when I wrote:
The report as a whole is a little maddening, because it’s so hedged that pretty much anyone could take the findings and wield them as supporting their viewpoint (even as the report blares “important limitations remain and these results should be interpreted with caution”).
And Krugman didn’t disappoint in this regard. In the blog post, he gives the nickel summary of what Dodd-Frank’s resolution authority is supposed to accomplish, and really only offers this single paragraph to explain the GAO report’s contribution.
Still, you’d like some evidence. And GAO has the goods. There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.
There’s quite the logical leap from the penultimate sentence to the last one. Krugman already gets out a bit over his skis when he says the subsidy “has now been diminished or gone away – maybe even slightly reversed,” but the next line is really a gross distortion. In fact the report doesn’t really say that future bailouts won’t be as favorable to the fat cats, or even that market participants believe that: it does say that large financial institutions would likely continue to enjoy lower funding costs than their counterparts in times of high credit risk (see page 40). Furthermore, the report so completely second-guesses itself that it shouldn’t be taken as evidence of anything, as the report itself states in numerous spots. Presumably a Nobel Prize winner has come across reports with muted conclusions before and would know not to get too far out in front of the facts by amplifying them.
So let’s see how this blog post, witnessed by a relatively modest set of readers, gets transformed into the newspaper column, presumably witnessed by more. Here’s the relevant exchange.
And a new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared. To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do.
Well, no, the report did not say that the advantage has “essentially disappeared.” GAO ran 42 models to try and assess the subsidy. In 2013, 18 of those models effectively tested positive for the subsidy, 8 tested negative, and 16 showed nothing. That’s fairly inconclusive, and not at all as definitive as Krugman makes it.
Of course, he does hedge that second sentence, right? That’s because Gretchen Morgenson reported on the same study in the news, and managed to get it right, contra what Krugman thought he could get away with on the op-ed page.
(GAO’s) methodology was convoluted and its conclusions hardly definitive. The report said that while the big banks had enjoyed a subsidy during the financial crisis, that benefit “may have declined or reversed in recent years.” […]
The trouble with this mishmash is that big bankers and even policy makers will cite these figures as proof that the problem of too-big-to-fail institutions has been resolved. Mary J. Miller, the departing under secretary for domestic finance at the United States Treasury, wrote in a letter about the report: “We believe these results reflect increased market recognition of what should now be evident — Dodd-Frank ended ‘too big to fail’ as a matter of law.”
Not exactly. As the report noted, the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm.
In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us.
There’s more: Morgenson actually watched the hearing about the report, and found credible questioning of GAO’s methodology, in particular the narrow way in which they defined the subsidy as entirely about lower debt costs, instead of the lower cost of equity and benefits to stockholders. I’ve also heard that bond prices, with their focus on immediate-term risk, are simply an inaccurate indicator of short-term borrowing costs, particularly those in the securities lending markets.
The reason Krugman took the shades of grey out of these conclusions, when he among anyone understands the value of data, can be seen in the pre-arranged narrative he concocted to fit around the GAO study. Krugman wants to tell a story about how Obama’s main two reforms, despite negative publicity and relative unpopularity, actually have performed quite well. That’s the Big Story, and everything has to conform to that. So he takes his shortcuts. You can draw your own conclusions about Obamacare. But on Dodd-Frank, he’s just dancing around the evidence. And ignoring a whole host of issues with the financial system, hanging his entire perspective on one GAO report, which it even admits makes its case on ground that’s about as solid as quicksand.
Two more things. It’s amusing that Krugman leans so heavily on Mike Konczal, in the blog and the column, as a primary source, because Konczal actually points out in the story Krugman links that financial reform shouldn’t be so concentrated on TBTF, which is of course almost precisely what Krugman does. Konczal also says that Dodd-Frank will hinge on how the regulators handle the living wills and resolution authority rules that are being decided right now (and there’s substantial reason to believe that they’re not being handled very well). But Krugman takes resolution authority as a fait accompli, because GAO “proved” (read: didn’t prove) that the market ended the subsidy (read: that’s completely inconclusive).
Finally, there’s this piece of effluvium, from the blog post (and largely replicated in the column):
But Republican leaders fiercely opposed financial reform — and claimed that resolution authority actually made too-big-to-fail worse, because it institutionalized bailouts. This always seemed implausible; bailouts will happen in crises, one way or another. And if financial reform was a giveaway to the banks, why did Wall Street, which used to look relatively favorably on Democrats, turn overwhelmingly Republican after reform passed?
First of all, Krugman writes “bailouts will happen in crises” in a post about how bailouts won’t happen anymore. Hilarity ensues. But I want to focus on the second half, this intellectually lazy statement that, if Wall Street is lobbying against Dodd-Frank, well then it must be working.
This is absurd. You can create an entirely consistent story of bank lobbyists trying to minimize the effect of regulations to maximize profits, PLUS the fact that the regulation won’t work in a crisis. Both things can be true. In addition, it shows an ignorance to how these things work. Wall Street fights tooth and nail against modest regulations so that stronger regulations never get contemplated. That’s how Congress gets neutered and regulations stay modest. Wall Street spends $1.5 million a day lobbying because of the excellent return on investment. Why wouldn’t they just lobby against any infringement on their business, no matter how small? Barney Frank himself, by the way, said in an article this weekend about Goldman and other big banks, “I don’t think that the [Dodd-Frank] legislation really hurt them much.” Presumably, he would know.
The bottom line is that this exhibits pure party-based tribalism. Take whatever half-truth you can turn into a talking point and parade it. And because it comes from an anointed spokesman of the Left in the mainstream circles, the hedged conclusions get spun into iron laws. The Reuters daily roundup Counterparties puts Krugman atop a summary they call “Farewell to Too Big to Fail.” (On the other hand, I was glad to see Bob Kuttner call Krugman out for this, however gently.)
If Krugman wants to become the President’s mouthpiece in the second term, that’s his business. But doing so by fudging the data is pretty weak.