Yves here. Normally, it would seem to behoove Naked Capitalism to analyze the provisions of a proposed rollback of Dodd Frank which may come up for a Senate vote this week. But with the bill already having a dirty dozen Democratic co-sponsors, the die is already cast.
So we’ll offer a few high-level observations instead:
Banks have not been suffering in terms of profits, so exactly what is the problem that needs to be solved? And that’s before you get to the fact that banks enjoy such extensive subsidies that they should not be treated like private businesses but regulated like old-fashioned utilities. The idea that banks have a right to earn more that a modest level of profit to help fund expansion in line with overall economic growth is in fact detrimental to the economy.
In fact, as we’ve also pointed out, policymakers and elected officials should be seeking to shrink the financial sector. In recent years, a raft of studies have found that for developed economies, bigger financial sectors are a drag on growth. The IMF concluded in 2015 that Poland had the optimal level of banking system development. More than that could be productive only if financial firms were well regulated.
In fact, as currently configured (the weak post crisis re-regulation didn’t do enough to change this overall picture), the banking sector is extractive. We’ve regularly cited a seminal paper, The $100 Billion Dollar Question, by the Bank of England’s director of financial stability, Andrew Haldane. He ompared the banking industry to the auto industry, in that both produce pollutants: for cars, exhaust fumes; for bank, systemic risk. While economists were claiming that the losses to the US government on various rescues would be $100 billion (ahem, must have left out Freddie and Fannie in that tally), they ignored the broader costs (unemployment, business failures, reduced government services, particularly at the state and municipal level). His calculation of the world wide costs:
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
That means a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.
But our feckless Congresscritters are all too happy to throw pretty much everyone under the bus to curry favor with pet donors.
Contrary to bank-promoted urban legend, there isn’t a shortage of liquidity. Even back in the stone ages of my youth, investors didn’t complain about a lack of liquidity in the bond markets. Moreover, there is evidence that too much liquidity is a bad thing, because it makes unproductive speculation too easy.
Similarly, blaming Dodd Frank or other bank regulations on supposedly too little small business lending is another canard. First, unless the cost of money is their biggest expense, entrepreneurs don’t borrow because money is cheap. They borrow because they see an opportunity. And for businesses of all sizes, retained earnings is the most important source of expansion capital. Businessmen are mindful of the dangers of leverage.
Second, as we’ve discussed regularly, the reason banks do so little in the way of small business lending is they started abandoning it in the late 1980s and early 1990s as they turned branches into retail stores. They went to using FICO-based scoring to originate various loans and sold most of them into securitizations. They stopped training credit officers who were able to analyze the risks of lending to idiosyncratic businesses, and to the extent that there will still old-school branch managers who had those skills, they cut or got rid of their ability to make discretionary loans and also gutted the higher level supervisory apparatus for small business loans.
Despite bank whinging about complexities and cost, guess what? It will cost them money to undo the procedures they’ve put in place for Dodd Frank compliance.
It’s fair to say that some provisions of Dodd Frank were not well specified, particularly the Volcker Rule, where there were better approaches for retraining banks’ taking proprietary bets either on their trading desks or in prop trading groups. While facilitating a customer trade does involve betting house monies, Value at Risk was well-suited to measure whether trading desks were doing prop trading on the sly. But the banks go.
Oh, and last but not least, the proposed legislation will make it easier to get away with discrimination in mortgage lending. If you think this is just people of color issue (which is bad enough), you need to think twice. In New York City, where discrimination is permissible in co-ops (the legal structure is you aren’t buying housing, you are buying shares in a co-op corporation, which then gives you a proprietary lease to “your” unit, and the co-op requires buyers to answer extensive questionnaires and be interviewed in person), single women and single men are not even shown apartments in certain buildings because they will never be approved, and many of the most exclusive buildings also have quotas for Jews.
The Massachusetts senator refuses to let a “Bank Lobbyist Act” pass without a fight.
Cooperation between Republicans and Democrats has become something of a rarity in today’s polarized political environment—except when it comes to a select handful of objectives, like enriching Wall Street banks.
If passed, the legislation—derisively labeled “The Bank Lobbyist Act” by Warren and other critics—would make it more difficult to combat racial discrimination by big banks, provide regulatory relief for more than two dozen of the nation’s large financial institutions, and eliminate many consumer protections put into place after the 2008 financial crisis.
The Senate – with the support of some Democrats – is set to start debate on a bill to roll back regulations on the same big banks we bailed out a few years ago. If we lose the final vote next week, we’ll be paving the way for the next big crash. https://t.co/i7HO3AvNJ9
— Elizabeth Warren (@SenWarren) March 2, 2018
We’ve been down this road before. Whenever things are going ok in the financial system, the lobbyists flood the halls of Congress & convince politicians to roll back the rules – because what could possibly go wrong? https://t.co/7rUKIajJ8Q
— Elizabeth Warren (@SenWarren) March 2, 2018
In a Twitter thread on Friday, Sen. Elizabeth Warren (D-Mass.) called attention to a massive bank deregulation bill (S.2155) that could reach the Senate floor for a final vote next week, and highlighted the fact that a dozen Democrats are providing crucial support for the measure.
In addition to Sen. Angus King (I-Maine), the 12 Democratic senators currently co-sponsoring the deregulation measure are: Doug Jones (Ala.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Jon Tester (Mont.), Mark Warner (Va.), Claire McCaskill (Mo.), Joe Manchin (W.Va.), Tim Kaine (Va.), Gary Peters (Mich.), Michael Bennet (Colo.), Chris Coons (Del.), and Tom Carper of Delaware.
In a video posted to Twitter on Friday, Warren explained that this bipartisan effort to fullfill “the wish lists of big bank lobbyists” goes a long way toward illustrating how Congress works for the wealthiest at the expense of the majority of the public.
The Senate should be working to #EndGunViolence. Instead, Mitch McConnell is teeing up legislation on what he thinks is a much more pressing issue: fulfilling the wish lists of big bank lobbyists. pic.twitter.com/Lwu0SOnFSc
— Elizabeth Warren (@SenWarren) March 2, 2018
Dubbed the “Bailout Caucus” by the advocacy group Rootstrikers, the Democrats backing the deregulation bill—introduced by Sen. Mike Crapo (R-Idaho) last November—have deep ties to the financial industry.
Earlier this week, a coalition of advocacy groups—including Rootstrikers, Public Citizen, and CREDO—delivered 450,000 petition signatures to members of Congress demanding that they reject Crapo’s measure.As Talmon Joseph Smith observed in an article for The New Republic on Thursday, “Nine of the 12 Democrats supporting the deregulatory measure count the financial industry as either their biggest or second-biggest donor.”
“Do not collaborate with Donald Trump and Trump Republicans to deregulate big banks,” CREDO’s petition reads. “We need to finish the job of Wall Street reform and end a dangerous and rigged system that puts our economy at risk, not roll back the reforms already in place.”
Warren is hardly the only Democrat who has joined advocacy groups in opposing the deregulation bill, which would gut the already limited Dodd-Frank regulations put in place by the Obama administration following the 2008 crash.
“It’s a whose-side-are-you-on moment,” warned Sen. Sherrod Brown (D-Ohio) in an interview with the Huffington Post. “Are you with the big banks and the Wall Street operators who wrecked the economy and got big bailouts, or are you with families and workers?”