By David Dayen, a lapsed blogger. Follow him on Twitter @ddayen.
The reason I’m filling in today and tomorrow is that Yves is in Washington for the INET Finance and Society conference, which is unique because it features a dozen and a half speakers, every one of them a woman, from Fed Chair Janet Yellen to IMF Chair Christine Lagarde to the SEC’s Kara Stein to CFTC’s Sharon Bowen to Treasury’s Sarah Bloom Raskin to many more, from the U.S. and around the world. Anat Admati of Stanford University organized the event, and you can watch the webcast tomorrow at this link. Maybe you’ll spy Yves stalking the halls.
As INET’s Rob Johnson said by way of introduction at tonight’s opening dinner, “the old boy’s club was not a committee that saved the world.” He quipped that the best think you could do for financial reform is to only have women regulate it. While gender does not define a willingness to go hard at the banks for their practices, it certainly appears that a group of them represent outsiders, unwilling to accept elite spin and able to fight the prevailing wisdom. So I’m pretty excited about this conference and bummed that I couldn’t make it out to D.C.
One of those women is Senator Elizabeth Warren, who gave the keynote address tonight. I’m going to embed it here; Rob Johnson is as always quite good, but so you know, Warren’s remarks begin at about 12:00:
Let me add a couple comments. This was basically the same speech as the one Warren gave at the Minsky lecture a couple weeks ago, which set a broad framework for the financial reform we still must enact. I wrote about that speech a couple weeks ago, so you can check it out there. In short, I think one reason for Warren’s appeal is that she has a coherent vision for how the economy should work: that actions should have consequences, so all participants in a market economy have a relatively equal shot at success. This includes actually prosecuting wrongdoing, breaking up the banks, ending bailouts, extending the regulatory perimeter to cover shadow banking, and changing the tax code to end the preference of debt over equity, among other points. But you can read about that at the link, or read this piece at Bloomberg. Warren actually added two elements to that framework last night.
1) Ending, or at least severely limiting, the Federal Reserve’s 13(3) emergency lending authority. This was in the Minsky speech, so it’s not really something new. But it was a bigger point of emphasis. Here’s the key text:
Second, Congress must carefully limit the Fed’s ability to provide emergency lending to a giant bank that gets into trouble. In the 2008 crisis, the Fed used its authority to provide – I’m glad everybody’s sitting down – $13 trillion dollars in low-cost loans to a handful of Too Big to Fail banks. Think about that: it wasn’t TARP or anything the Congress voted on. On their own, the Fed just kept shoveling money at nearly zero interest rates into a half-dozen Too Big to Fail banks. Congress should step in and make clear that the Fed isn’t the personal piggy bank for biggest financial institutions in this country.
This has become more prominent because Warren actually has a Republican partner for this. Bloomberg reported last week that Warren and David Vitter were working on legislation to “carefully limit” 13(3) authority. The Fed has proposed a rule on 13(3) loans, but Warren said in the Minsky speech that it was “so weak that it might as well not exist.” It seems the Warren/Vitter end product will come closer to the Bagehot rule to use crisis funds to “lend freely, but at a penalty rate.” Only solvent banks, under a strict definition, could receive loans for a limited time at a significantly elevated interest rate. There’s apparently a bill moving from Senate Banking Committee chair Richard Shelby which may, among other things, limit the authority of the New York Fed, so getting a Republican co-sponsor on 13(3) reform could allow this to attach to that.
The old boy’s club will obviously argue that the Fed must have maximum flexibility in a crisis, but that distorts the market, because of the easy knowledge that banks will get bailed out, if not by Congress then by the Fed.
2) At the end of the speech, Warren highlighted trade. And made a point that hasn’t been been overlooked by opponents, surprisingly. Trade promotion authority, Warren said, “would prevent Congress from amending trade deals and reduce Congress’ ability to block trade deals not just for the upcoming Trans-Pacific trade deal, but for any trade deal cut by any President over the next 6 years.”
It definitely plays to tribal sympathies to point this out, that the next President could be a Republican, with access to fast track. But hey, any port in a storm: this is at root a political fight, and if Democratic House members fear fast track in the hands of a Republican and vote against it for that reason, who am I to point out the bipartisan nature of trade agreements? Warren noted that Ted Cruz wants to repeal Dodd-Frank, and fast track could help him do that. It’s a sharp political frame.
Could a President could use a trade deal to override financial rules? Well, it’s been a part of trade agreements since the late 1980s, including the WTO. In fact, WTO rules prevent firewalls like Glass-Steagall: when the U.S. negotiated it in 1997, they added an intent to repeal it, which of course happened two years later, in time for the WTO’s implementation. (Size caps on financial institutions are actually also banned by WTO rules.)
Financial services deregulation is more of an issue for the TTIP, the proposed U.S.-European agreement. European negotiators, if anything more embedded with their banks, have insisted on including a financial regulation chapter, which the U.S. has thus far rejected. By the time TTIP gets locked in, another President could be in office who wouldn’t be so rigid on that point.
A new President would have plenty of ways to undermine Dodd-Frank or any other regulation – mostly by hiring regulators who specialize in looking the other way. But setting limits in trade deals just adds an extra chip. And as a political matter, if fearing the other side works to stop fast track, well, whatever works.