Amazingly Important Piece from Gretchen Morgenson
For Gretchen Morgenson to come right out and say, at length and in detail, that the current approach to financial reform is mostly a reaffirmation of the status quo is a huge development. Morgenson is respected by everyone (she is also the single-most-quoted source in PANIC). It will be very hard to represent opposition to this bill as sucking up to the banks with people of her stature saying this kind of thing.
That’s what we have been saying all along about both the Dodd and Frank bills as well as lame Republican compromises—they are not so much evil as irrelevant; they change nothing.
Before the crash we had vague consensus among the regulators that the banks should do: exactly what they were doing—including mortgage backed securities, which the regulators loved.
Under Dodd/Frank we would have a formal consensus of the Council of Regulators that the banks should do: exactly what they are doing.
Before we had no plan for “resolving” the simultaneous failure of several-trillion-dollar mega banks.
Now we have a hopelessly inadequate plan: let the FDIC do it, despite zero evidence that the FDIC or any government agency is capable of pulling off such a complex maneuver under pressure.
Last time round, from at least the fall of Bear Sterns in March 2008 onward, the government had its own auditors and risk managers sitting in the executive suites of every one of the major banks. And yet the government still had no plan by September, which is how it ended up throwing $700 billion in taxpayer bailouts at the problem.
Under Dodd, a $50 billion kiddie pool raised from the banks is supposed to be enough to keep the taxpayers off the hook.
Under the old system, consumer protection became a paramount concern of banking regulation, trumping safety and soundness. That’s how we got zero-percent-down liar’s loans. What we now call “predatory lending” used to be the fight against redlining.
Under the new system some new consumer protection fad—not predatory lending, which is now evil—would be allowed to trump safety and soundness.
Finally, under the old system Congress retained essentially direct supervision of Fannie and Freddie, ignoring the recommendations of a toothless regulator and swearing up and down it would not let the twins become a systemic danger.
Under the new system Congress retains essential control of Fannie and Freddie and says it will get around to addressing the problem someday.
Still, precisely because the current approach is an irrelevant reaffirmation of the status quo, rather than evil in a new and clever way, it doesn’t need to be killed. All Congress needs to do is add one reform that actually will work. Morgenson, like Prof. Kling over at Cato, suggests breaking up the banks—just don’t let them be too big to fail. We don’t really care about that; but it also won’t solve the problem. U.S. History shows that lots of little banks failing can be every bit as disastrous as few big banks going down.
Our solution, as always, is not to break up the banks but open them up. Make them publish a detailed, line by line, listing of their holdings—every stock, bond, option, swap, derivative, conventional loan and what have you, on and off balance sheet—not less than once a week, so investors will know which banks own garbage and which have the good stuff. Such a policy in place in 2004 would have reduced the mortgage crisis to a speed bump and certainly would have kept it from morphing into a banking crisis.
Tags: Andrew Redleaf, banking crisis, barney frank, dodd, Fannie and Freddie, Gretchen Morgenson, Richard Vigilante
