One of our beefs has been the lack of any progress, even interesting trial balloons, on the financial firm reform front. And that’s a serious problem.
Economists like to point to the Great Depression as the textbook example that fiscal stimulus works. FDR launches a bunch of spending plans, and voila, by 1936, the economy looked vastly better, but then in 1937, efforts to balance the budget put the growth back in reverse gear.
I’m not convinced the story is that simple. The Depression also included a lot of specific reforms and innovations, some of which were bad ideas and ditched, like the National Recovery Act. But measures like the securities laws of 1933 and 1934, and Federal deposit insurance were important in restoring faith in badly tarnished industries. And the Japanese example also suggests that stimulus without cleaning up the banking industry is ineffective.
John Dizard takes up many of our pet themes: the wrong people are in charge, the Fed lacks the inclination and skills to be an uber finance regulator. It is not a pretty picture.
From the Financial Times:
For all the camera-ready shouting and calm exchanges concerning the risks exposed by the financial crisis, there is one risk that gets no attention: the risk of putting weak people in positions of leadership.
I’ve been calling around to get a sense of the progress being made on structural reforms of the US securities markets. The answer is: very little, if any….
The financial system has a peacetime officer corps in a wartime situation. The people in positions of responsibility are principally interested in preserving their careers and avoiding public embarrassment. There are rare and important exceptions, such as Paul Volcker, who has nothing to prove about his integrity, and who is past any need to advance his career.
To identify what has to be done to put securities markets, banking and regulation on a sound basis for the future, the people at the top might have to admit to the specifics of their own past mistakes. They would also need a command of detail of the workings of the financial system that they have avoided acquiring over the years, since it was much more advantageous to spend one’s time scheming and toadying.
This is a naturally occurring aspect of human nature, but it is usually kept in check by periodic crises, which thin the herd and force the survivors to adapt. The “great moderation”, also known as periodic monetary bail-outs, in developed countries for the past couple of decades has prevented that process.
Let’s consider a specific issue, the reform of the leading US ratings agencies…So what are the federal regulators, and Congress, actually doing about ratings agency reform?
Not much. The crucial agency is the Securities and Exchange Commission….According to a securities industry person who has had intensive contact with the SEC lately, its staff are preoccupied with damage control. “They’re not thinking about ratings reform, they’re thinking about keeping their jobs. The Bernie Madoff fiasco has them in shell shock.”
Mary Schapiro, the new chairman of the SEC, has said that the ratings agencies’ conflicts should be looked into, but that suggests a rather long time horizon to revive confidence in the system.
Sean Egan, whose Egan-Jones rating agency is one NRSRO that is paid by the investors, not the issuers, is frustrated by the slow progress in the reform process. “You have to back up to why the markets are frozen, and the answer is a lack of credibility in risk assessment,” Mr Egan says…
There is a widespread assumption that the Federal Reserve is available as a universal, supreme regulator of all financial risk. However, the Fed staff are preoccupied with figuring out the details of the various “temporary” support programmes. Not many of them have operating experience in financial markets; they were employed to take the long view on monetary policy, not for the tactical execution of investment programmes. Those are very different disciplines.
Congressional leaders know that. Democratic and Republican senators share a high degree of scepticism about the ability of the Fed, effectively, to redesign and then run the financial world.
In the past, there were Wall Streeters of both parties with sufficient weight and creditability to identify problems and put together solutions. Not now. All we need to end the remaining illusions, is, I believe, one more big trauma. Auto companies?