Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems.

    Apr 16, 2013Mike Konczal

    In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, "Growth in a Time of Debt." Their "main result is that...median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower." Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

    This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan's Path to Prosperity budget states their study "found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth." The Washington Post editorial board takes it as an economic consensus view, stating that "debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." 

    Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren't releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right - it couldn't be done.

    In a new paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.

    They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result. Let's investigate further:

    Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn't disclose which years they excluded or why.

    Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.

    Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that the U.K. is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.

    In case that didn't make sense, let's look at an example. The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.

    Now maybe you don't want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don't discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.

    Coding Error. As Herndon-Ash-Pollin puts it: "A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49...This spreadsheet error...is responsible for a -0.3 percentage-point error in RR's published average real GDP growth in the highest public debt/GDP category." Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).

    Being a bit of a doubting Thomas on this coding error, I wouldn't believe unless I touched the digital Excel wound myself. One of the authors was able to show me that, and here it is. You can see the Excel blue-box for formulas missing some data:

    This error is needed to get the results they published, and it would go a long way to explaining why it has been impossible for others to replicate these results. If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.

    So what do Herndon-Ash-Pollin conclude? They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]." [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.

    This is also good evidence for why you should release your data online, so it can be properly vetted. But beyond that, looking through the data and how much it can collapse because of this or that assumption, it becomes quite clear that there's no magic number out there. The debt needs to be thought of as a response to the contingent circumstances we find ourselves in, with mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are. The past guides us, but so far it has failed to provide evidence of an emergency threshold. In fact, it tells us that a larger deficit right now would help us greatly.

    [UPDATE: People are responding to the Excel error, and that is important to document. But from a data point of view, the exclusion of the Post-World War II data is particularly troublesome, as that is driving the negative results. This needs to be explained, as does the weighting, which compresses the long periods of average growth and high debt.]

    [UPDATE: Check out the next post from this blog on Reinhart-Rogoff, a guest post by economist Arindrajit Dube. Now that 90 percent debt-to-GDP is no longer a cliff for growth, what about the general trend between the two? Dube finds significant evidence that reverse causation is the culprit.]

    Follow or contact the Rortybomb blog:

      

     

    In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, "Growth in a Time of Debt." Their "main result is that...median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower." Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

    This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan's Path to Prosperity budget states their study "found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth." The Washington Post editorial board takes it as an economic consensus view, stating that "debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." 

    Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren't releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right - it couldn't be done.

    In a new paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.

    They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result. Let's investigate further:

    Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn't disclose which years they excluded or why.

    Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.

    Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that the U.K. is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.

    In case that didn't make sense, let's look at an example. The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.

    Now maybe you don't want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don't discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.

    Coding Error. As Herndon-Ash-Pollin puts it: "A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49...This spreadsheet error...is responsible for a -0.3 percentage-point error in RR's published average real GDP growth in the highest public debt/GDP category." Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).

    Being a bit of a doubting Thomas on this coding error, I wouldn't believe unless I touched the digital Excel wound myself. One of the authors was able to show me that, and here it is. You can see the Excel blue-box for formulas missing some data:

    This error is needed to get the results they published, and it would go a long way to explaining why it has been impossible for others to replicate these results. If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.

    So what do Herndon-Ash-Pollin conclude? They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]." [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.

    This is also good evidence for why you should release your data online, so it can be properly vetted. But beyond that, looking through the data and how much it can collapse because of this or that assumption, it becomes quite clear that there's no magic number out there. The debt needs to be thought of as a response to the contingent circumstances we find ourselves in, with mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are. The past guides us, but so far it has failed to provide evidence of an emergency threshold. In fact, it tells us that a larger deficit right now would help us greatly.

    [UPDATE: People are responding to the Excel error, and that is important to document. But from a data point of view, the exclusion of the Post-World War II data is particularly troublesome, as that is driving the negative results. This needs to be explained, as does the weighting, which compresses the long periods of average growth and high debt.]

    [UPDATE: Check out the next post from this blog on Reinhart-Rogoff, a guest post by economist Arindrajit Dube. Now that 90 percent debt-to-GDP is no longer a cliff for growth, what about the general trend between the two? Dube finds significant evidence that reverse causation is the culprit.]

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  • Mapping Out the Arguments Against Chained CPI

    Apr 9, 2013Mike Konczal

    Reports started coming in late last week that President Obama’s budget, to be released early tomorrow, will include a change to the cost-of-living adjustment (COLA) for Social Security. Specifically, it will adopt a “chained CPI” (consumer price index) measure.

    Many people have been writing stories about why this is a bad idea. I want to generalize them into four major categories of critique of moving to a chained CPI (with one aside). As you read stories about the pros and cons of this change in the weeks ahead, hopefully this guide can provide some background.

    Accuracy, or Lack Thereof

    Economists like the idea of chained CPI because they think it’s more representative of how people behave when they substitute among goods. In this story, we have been over-correcting for inflation in the past decades.

    However, as a letter from EPI, signed by 300 economists and social insurance experts, explains, it is just as likely as we are under-correcting. EPI notes "it is just as likely that the current COLA fails to keep up with rising costs confronting elderly and disabled beneficiaries." The current adjustment is based on an index of workers excluding retirees.

    If you look into the data, the elderly spend a lot more of their limited money on housing, utilities, and medical care. Health care costs have been rising rapidly over the past several decades, and it is difficult to substitute on other necessary, fixed-price goods like utilities. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in price as quickly as what the elderly purchase. As a result, the CPI-E (the index tailored to the elderly) has increased 3.3 percent a year from 1982 to 2007, while the CPI-W (tailored to wage earners) has only increased 3 percent a year. Definitionally, through the way it is calculated, chained CPI-W will always be lower than CPI-W. [Edit: This will almost certainly be lower, but it isn't definitionally true.]

    As Dean Baker has noted, if accuracy were the only motive for changing COLA, it would be relatively easy to get a full, chained version of the index of prices faced by the elderly and use that. That has not been proposed.

    Hedging Unexpected Longevity

    Another argument is that this is a relatively small cut, or that a slower rate of growth shouldn’t really be thought of as a cut. But there’s a big problem with this.

    There are many nice things about the design of Social Security, but one of them is that it is a form of insurance against the downsides of living longer than expected. Let’s say you retire at 65, believe you’ll live to 85, and save enough to make it to 88 just in case. And then you live to 92. Are those last five years absolutely miserable, with your savings completely depleted and an inability to earn market wages except through begging and charity? No, because my man Franklin Delano Roosevelt and Social Security got your back. Social Security helps hedge against two risks that are very difficult to manage: when you were born (and thus the years into which you’ll retire) and how long you’ll live.

    Notice how chained CPI cuts, though. In the same way that compounding interest grows quickly over time because you get interest on what you’ve saved, a lower cost-of-living adjustment creates a lower baseline for future adjustments, so the cuts grow over time.

    This means that the real cuts come from people who happen to live the longest. Which is precisely one of the risks Social Security is meant to combat. This is one reason why women, who live longer than men, are much more at risk from these chained CPI cuts.

    Aside: Can’t We Balance the Downside?

    You’ll notice liberals who support moving to chained CPI have complicated “swallow a bird to catch the spider who’s catching the fly” policy proposals to go along with it. If we swallow Obama’s chained CPI proposal, we’ll need to swallow an age “bump” to catch chained CPI from falling heavily on the very old. But after we swallow the age bump, we’ll need to swallow some sort of exemption for Supplemental Security Income to catch the fact that the change would still fall heavily on the initial benefit level for the poorest elderly and disabled people. And so on.

    Doing all these fixes, of course, eliminates much of the savings that people are hoping to get. And it is unlikely that these clever ways of balancing the worst effects of the change will get even a single Republican vote. And of course, in spite of all this effort, Republicans could still call out the president for proposing to cut Social Security.

    Neither Grand nor a Bargain

    You’ll hear arguments that a Grand Bargain is necessary, so it’s better to bring Social Security into long-term balance now, with Democrats at the helm, than in the future, when there will be less time and an uncertain governance coalition. You can get fewer cuts and more revenue than you would otherwise and take the issue off the table for the foreseeable future to concentrate on other priorities.

    But if that’s your idea, then this is a terrible deal and sets a terrible precedent, because this deal would accomplish none of your goals. You'd cut Social Security without putting in any new revenue. And it wouldn't be sufficient to close the long-term gap, so the issue would stay on the table. Indeed, the deficit hawks would probably be emboldened, viewing this as a "downpayment" on future cuts, and require any future attempts to get more revenue for Social Security, say by raising the payroll tax cap, to involve significant additional cuts.

    We Need to Expand Social Security

    As Michael Lind, Joshua Freedman, and Steven Hill of the New America Foundation, along with Robert Hiltonsmith of Demos, expertly document, Social Security should be expanded in the years ahead, not cut.

    Retirement security is meant to be a three-legged stool of Social Security, private savings, and employer pensions. The last two legs of that stool have been collapsing in the past few decades, and there is no reason to believe that this will change in the near future. 401(k)s have been a boon for the rich to avoid taxes and save money that they’d be saving anyway, while it isn’t clear that average Americans have saved enough to offset declining pensions. Median wages have dropped in the recession and are likely to show little growth in the years ahead, which makes building private savings harder. There isn't a ton to cut - even the middle income quintile of retirees, making only around $20,000 a year, get 62 percent of their income from Social Security.

    There are many ways to boost Social Security, and the New America paper introduces one. But as the authors note, “[a]ny strategy that expands the reliable and efficient public share of retirement security in America would be an improvement over today’s system, which is biased toward the affluent and skewed toward private savings.” And the best way to do programs is to build out programs that already work well.

    Any other stories out there that require a new category?

    Follow or contact the Rortybomb blog:

      

     

    Reports started coming in late last week that President Obama’s budget, to be released early tomorrow, will include a change to the cost-of-living adjustment (COLA) for Social Security. Specifically, it will adopt a “chained CPI” (consumer price index) measure.

    Many people have been writing stories about why this is a bad idea. I want to generalize them into four major categories of critique of moving to a chained CPI (with one aside). As you read stories about the pros and cons of this change in the weeks ahead, hopefully this guide can provide some background.

    Accuracy, or Lack Thereof

    Economists like the idea of chained CPI because they think it’s more representative of how people behave when they substitute among goods. In this story, we have been over-correcting for inflation in the past decades.

    However, as a letter from EPI, signed by 300 economists and social insurance experts, explains, it is just as likely as we are under-correcting. EPI notes "it is just as likely that the current COLA fails to keep up with rising costs confronting elderly and disabled beneficiaries." The current adjustment is based on an index of workers excluding retirees.

    If you look into the data, the elderly spend a lot more of their limited money on housing, utilities, and medical care. Health care costs have been rising rapidly over the past several decades, and it is difficult to substitute on other necessary, fixed-price goods like utilities. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in price as quickly as what the elderly purchase. As a result, the CPI-E (the index tailored to the elderly) has increased 3.3 percent a year from 1982 to 2007, while the CPI-W (tailored to wage earners) has only increased 3 percent a year. Definitionally, through the way it is calculated, chained CPI-W will always be lower than CPI-W. [Edit: This will almost certainly be lower, but it isn't definitionally true.]

    As Dean Baker has noted, if accuracy were the only motive for changing COLA, it would be relatively easy to get a full, chained version of the index of prices faced by the elderly and use that. That has not been proposed.

    Hedging Unexpected Longevity

    Another argument is that this is a relatively small cut, or that a slower rate of growth shouldn’t really be thought of as a cut. But there’s a big problem with this.

    There are many nice things about the design of Social Security, but one of them is that it is a form of insurance against the downsides of living longer than expected. Let’s say you retire at 65, believe you’ll live to 85, and save enough to make it to 88 just in case. And then you live to 92. Are those last five years absolutely miserable, with your savings completely depleted and an inability to earn market wages except through begging and charity? No, because my man Franklin Delano Roosevelt and Social Security got your back. Social Security helps hedge against two risks that are very difficult to manage: when you were born (and thus the years into which you’ll retire) and how long you’ll live.

    Notice how chained CPI cuts, though. In the same way that compounding interest grows quickly over time because you get interest on what you’ve saved, a lower cost-of-living adjustment creates a lower baseline for future adjustments, so the cuts grow over time.

    This means that the real cuts come from people who happen to live the longest. Which is precisely one of the risks Social Security is meant to combat. This is one reason why women, who live longer than men, are much more at risk from these chained CPI cuts.

    Aside: Can’t We Balance the Downside?

    You’ll notice liberals who support moving to chained CPI have complicated “swallow a bird to catch the spider who’s catching the fly” policy proposals to go along with it. If we swallow Obama’s chained CPI proposal, we’ll need to swallow an age “bump” to catch chained CPI from falling heavily on the very old. But after we swallow the age bump, we’ll need to swallow some sort of exemption for Supplemental Security Income to catch the fact that the change would still fall heavily on the initial benefit level for the poorest elderly and disabled people. And so on.

    Doing all these fixes, of course, eliminates much of the savings that people are hoping to get. And it is unlikely that these clever ways of balancing the worst effects of the change will get even a single Republican vote. And of course, in spite of all this effort, Republicans could still call out the president for proposing to cut Social Security.

    Neither Grand nor a Bargain

    You’ll hear arguments that a Grand Bargain is necessary, so it’s better to bring Social Security into long-term balance now, with Democrats at the helm, than in the future, when there will be less time and an uncertain governance coalition. You can get fewer cuts and more revenue than you would otherwise and take the issue off the table for the foreseeable future to concentrate on other priorities.

    But if that’s your idea, then this is a terrible deal and sets a terrible precedent, because this deal would accomplish none of your goals. You'd cut Social Security without putting in any new revenue. And it wouldn't be sufficient to close the long-term gap, so the issue would stay on the table. Indeed, the deficit hawks would probably be emboldened, viewing this as a "downpayment" on future cuts, and require any future attempts to get more revenue for Social Security, say by raising the payroll tax cap, to involve significant additional cuts.

    We Need to Expand Social Security

    As Michael Lind, Joshua Freedman, and Steven Hill of the New America Foundation, along with Robert Hiltonsmith of Demos, expertly document, Social Security should be expanded in the years ahead, not cut.

    Retirement security is meant to be a three-legged stool of Social Security, private savings, and employer pensions. The last two legs of that stool have been collapsing in the past few decades, and there is no reason to believe that this will change in the near future. 401(k)s have been a boon for the rich to avoid taxes and save money that they’d be saving anyway, while it isn’t clear that average Americans have saved enough to offset declining pensions. Median wages have dropped in the recession and are likely to show little growth in the years ahead, which makes building private savings harder. There isn't a ton to cut - even the middle income quintile of retirees, making only around $20,000 a year, get 62 percent of their income from Social Security.

    There are many ways to boost Social Security, and the New America paper introduces one. But as the authors note, “[a]ny strategy that expands the reliable and efficient public share of retirement security in America would be an improvement over today’s system, which is biased toward the affluent and skewed toward private savings.” And the best way to do programs is to build out programs that already work well.

    Any other stories out there that require a new category?

    Follow or contact the Rortybomb blog:

      

     

    Share This

  • What Does the Leaked Brown-Vitter Bill on Too Big To Fail Do?

    Apr 9, 2013Mike Konczal

    Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have been working on a bill to block the largest banks and financial firms from receiving federal subsidies for being deemed Too Big to Fail. On Friday, a draft version of that bill was leaked to Tim Fernholz of Quartz, much to Vitter’s chagrin. So, what does the bill do?

    Let’s start with what it doesn’t do: It doesn’t break up the big banks. Rather, it focuses on how much capital they have to hold to protect themselves from disasters and would “prohibit any further implementation of” the international Basel III accords on financial regulation.

    But let’s back up. Banks hold capital to protect against losses. The more capital they hold, the safer they are from crisis. As Alan Greenspan said after the financial meltdown, “[t]he reason I raise the capital issue so often, is that, in a sense, it solves every problem.” The “ratio” in question is the amount of capital against the amount of assets. So, if a bank has $10 in cash and $100 in assets, its capital ratio is 1:10.

    Regulators set minimum capital ratios for banks. A capital ratio is like any other ratio, with a numerator and denominator. Some amount of capital held goes on top, and some value of the assets the bank holds goes on the bottom. The Brown-Vitter legislation would significantly change both parts of that ratio.

    This is where things get a bit wonky: Common equity is viewed as the best form of capital because it can directly absorb losses. Basel III puts more emphasis on using common equity than previous versions. There’s a baseline 4.5 percent buffer, which is supplemented by a 2.5 percent “capital conservation buffer.” In addition, Basel III also has requirements for categories of less effective forms of capital, grouped under Tier 1 and Tier 2, or “total capital.”

    As for the denominator, Basel III has risk-weighted the assets held by the firms. Firms use models and ratings to determine an asset’s risk. The riskier the asset, the more held capital needed in case of a loss. An asset rated as less risky requires less held capital. (You may remember the financial crisis involved both the ratings agencies and the financial sector getting these ratings very wrong for subprime mortgages.)

    The Brown-Vitter proposal would not adopt Basel III. It would instead have a baseline of 10 percent equity in the numerator consisting solely of common equity. There are also surcharges for capital over $400 billion, which would cover all assets regardless of their risk-weighting. So there would be a significant increase in equity. The denominator would also increase, forcing banks to hold even more capital. This approach has much in common with the recent book “The Banker’s New Clothes,” by Anat Admati and Martin Hellwig, and should be seen as a win for those arguing along these lines.

    Though it might seem like a technicality, risk-weighting assets is as significant in this proposal as a higher capital ratio. Risk-weighting was introduced by the first Basel in the late 1980s, using broad categories. It evolved to, among other goals, encourage firms to build out their risk management teams. However, those teams often acted as regulatory arbitrage teams instead. Many people view the system as encouraging race-to-the-bottom regulation dodging, backward-looking strategies that reduce capital held in a bubble and techniques that use derivatives and bad models to keep capital ratios low.

    Regulators are growing more critical, both domestically and internationally, about Basel III. That regulation has several measures to address problems with risk-weighted assets, from adjusting the numbers used to requiring capital for derivative positions. But it is unclear how well these will work in practice.

    Basel III has to be enacted by the banking regulators in the United States. The process began last summer (see a summary here). As Federal Reserve Governor Daniel Tarullo notes, regulators are expected to finish the Basel III capital rules this year and begin working on the rules for new liquidity requirements and other parts of Basel III.

    It is interesting that the Brown-Vitter bill would replace, rather than supplement or modify, Basel III. Basel III has a leverage requirement that does similar work to the extra equity requirements Brown-Vitter recommends. That rule is only set at 4 percent, instead of 10 percent, but could be raised while keeping the rest of the Basel rules intact.

    Because even those who want financial institutions to hold a lot more capital and less leverage may see a few downsides to abandoning Basel III. If firms go into Basel’s newly created capital conservation buffer, they can’t release dividends and are limited on bonuses. This, to use banking regulation jargon, is a way of requiring “prompt corrective action” on the part of both regulators and firms, who will normally drag their feet.

    Basel III isn’t just capital ratios, though. Another important element is its new liquidity requirements. Liquidity here refers to the ability of banks to have enough funding to make payments in the short term, especially if there’s a crisis. Basel III includes a “liquidity coverage ratio,” which requires banks to keep enough liquid funding to survive a crisis.

    Financial institutions have been lobbying against an aggressive implementation of Basel IIl’s liquidity requirements. They saw a small victory when some of the requirements were pulled back in the final rule in January. Brown-Vitter would remove them entirely — a remarkable win for the financial sector if the proposal passes.

    (There are already some liquidity requirements made since the financial crisis, but they aren’t as extensive as Basel lll. And because they have evolved consciously alongside Basel III, it’s unclear what would happen to them.)

    Note that this bill is explicit in not breaking up the big banks, either with a size cap or by reinstating Glass-Steagall. Two months ago in the House, Rep. John Campbell (R-Calif.) also introduced a bill designed to end Too Big To Fail, which called for banks to hold special convertible debt instruments while also repealing the Volcker Rule. There’s been a lot of talk about conservatives becoming aggressive on structural changes to the financial sector, but so far there’s no evidence of this in Congress.

    During the drafting of Dodd-Frank, Treasury Secretary Timothy Geithner argued against Congress writing capital ratios into law, preferring to leave it to regulators at Basel to find an internationally agreed-upon solution. Basel’s endgame is now coming into focus, and there needs to be a debate on how well it addresses our outstanding problems in the financial sector when it comes to bank capital. This bill means reformers might start to rally around the idea that dramatically increasing capital, as well as removing the emphasis given to measuring risks, is an important part of ending Too Big To Fail. Even if that means going against the recent Basel accords.

     

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    Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have been working on a bill to block the largest banks and financial firms from receiving federal subsidies for being deemed Too Big to Fail. On Friday, a draft version of that bill was leaked to Tim Fernholz of Quartz, much to Vitter’s chagrin. So, what does the bill do?

    Let’s start with what it doesn’t do: It doesn’t break up the big banks. Rather, it focuses on how much capital they have to hold to protect themselves from disasters and would “prohibit any further implementation of” the international Basel III accords on financial regulation.

    But let’s back up. Banks hold capital to protect against losses. The more capital they hold, the safer they are from crisis. As Alan Greenspan said after the financial meltdown, “[t]he reason I raise the capital issue so often, is that, in a sense, it solves every problem.” The “ratio” in question is the amount of capital against the amount of assets. So, if a bank has $10 in cash and $100 in assets, its capital ratio is 1:10.

    Regulators set minimum capital ratios for banks. A capital ratio is like any other ratio, with a numerator and denominator. Some amount of capital held goes on top, and some value of the assets the bank holds goes on the bottom. The Brown-Vitter legislation would significantly change both parts of that ratio.

    This is where things get a bit wonky: Common equity is viewed as the best form of capital because it can directly absorb losses. Basel III puts more emphasis on using common equity than previous versions. There’s a baseline 4.5 percent buffer, which is supplemented by a 2.5 percent “capital conservation buffer.” In addition, Basel III also has requirements for categories of less effective forms of capital, grouped under Tier 1 and Tier 2, or “total capital.”

    As for the denominator, Basel III has risk-weighted the assets held by the firms. Firms use models and ratings to determine an asset’s risk. The riskier the asset, the more held capital needed in case of a loss. An asset rated as less risky requires less held capital. (You may remember the financial crisis involved both the ratings agencies and the financial sector getting these ratings very wrong for subprime mortgages.)

    The Brown-Vitter proposal would not adopt Basel III. It would instead have a baseline of 10 percent equity in the numerator consisting solely of common equity. There are also surcharges for capital over $400 billion, which would cover all assets regardless of their risk-weighting. So there would be a significant increase in equity. The denominator would also increase, forcing banks to hold even more capital. This approach has much in common with the recent book “The Banker’s New Clothes,” by Anat Admati and Martin Hellwig, and should be seen as a win for those arguing along these lines.

    Though it might seem like a technicality, risk-weighting assets is as significant in this proposal as a higher capital ratio. Risk-weighting was introduced by the first Basel in the late 1980s, using broad categories. It evolved to, among other goals, encourage firms to build out their risk management teams. However, those teams often acted as regulatory arbitrage teams instead. Many people view the system as encouraging race-to-the-bottom regulation dodging, backward-looking strategies that reduce capital held in a bubble and techniques that use derivatives and bad models to keep capital ratios low.

    Regulators are growing more critical, both domestically and internationally, about Basel III. That regulation has several measures to address problems with risk-weighted assets, from adjusting the numbers used to requiring capital for derivative positions. But it is unclear how well these will work in practice.

    Basel III has to be enacted by the banking regulators in the United States. The process began last summer (see a summary here). As Federal Reserve Governor Daniel Tarullo notes, regulators are expected to finish the Basel III capital rules this year and begin working on the rules for new liquidity requirements and other parts of Basel III.

    It is interesting that the Brown-Vitter bill would replace, rather than supplement or modify, Basel III. Basel III has a leverage requirement that does similar work to the extra equity requirements Brown-Vitter recommends. That rule is only set at 4 percent, instead of 10 percent, but could be raised while keeping the rest of the Basel rules intact.

    Because even those who want financial institutions to hold a lot more capital and less leverage may see a few downsides to abandoning Basel III. If firms go into Basel’s newly created capital conservation buffer, they can’t release dividends and are limited on bonuses. This, to use banking regulation jargon, is a way of requiring “prompt corrective action” on the part of both regulators and firms, who will normally drag their feet.

    Basel III isn’t just capital ratios, though. Another important element is its new liquidity requirements. Liquidity here refers to the ability of banks to have enough funding to make payments in the short term, especially if there’s a crisis. Basel III includes a “liquidity coverage ratio,” which requires banks to keep enough liquid funding to survive a crisis.

    Financial institutions have been lobbying against an aggressive implementation of Basel IIl’s liquidity requirements. They saw a small victory when some of the requirements were pulled back in the final rule in January. Brown-Vitter would remove them entirely — a remarkable win for the financial sector if the proposal passes.

    (There are already some liquidity requirements made since the financial crisis, but they aren’t as extensive as Basel lll. And because they have evolved consciously alongside Basel III, it’s unclear what would happen to them.)

    Note that this bill is explicit in not breaking up the big banks, either with a size cap or by reinstating Glass-Steagall. Two months ago in the House, Rep. John Campbell (R-Calif.) also introduced a bill designed to end Too Big To Fail, which called for banks to hold special convertible debt instruments while also repealing the Volcker Rule. There’s been a lot of talk about conservatives becoming aggressive on structural changes to the financial sector, but so far there’s no evidence of this in Congress.

    During the drafting of Dodd-Frank, Treasury Secretary Timothy Geithner argued against Congress writing capital ratios into law, preferring to leave it to regulators at Basel to find an internationally agreed-upon solution. Basel’s endgame is now coming into focus, and there needs to be a debate on how well it addresses our outstanding problems in the financial sector when it comes to bank capital. This bill means reformers might start to rally around the idea that dramatically increasing capital, as well as removing the emphasis given to measuring risks, is an important part of ending Too Big To Fail. Even if that means going against the recent Basel accords.

     

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  • The Problem of Rents and the Wilt Chamberlain Example

    Apr 4, 2013Mike Konczal

    I wrote a piece at Wonkblog over the weekend about economic rents and the possibilities and limitations of conservatives and liberals coming together to tackle them. The issue of combating rents is interesting because it pushes against an argument that is taken to be a common sense and intuitive example of libertarian thought: the Wilt Chamberlain example. Looking at that example might help us understand some interesting issues about rent income. (This argument is taken from an excellent paper on the topic by Barbara Fried. If this blog does nothing but create a bigger audience for Fried's work, as well as Robert Hale's, I'll call it a huge win.)

    Let’s take your favorite example of rent income. Perhaps it is excessive copyright, criminal sanctions for unlocking your phone, zoning regulations that protect incumbent interests, live-saving drugs that are rationed above a market-clearing price due to patents, utilities that go unregulated, or something else.

    What’s the problem with these situations? At least some of the problem is distributional. People who collect income and wealth off of rents are collecting money that they don’t deserve. Nobody would think the problem of economic rents is that people are willing to pay them. In these situations, people are still buying and selling things. Slipping into a classically liberal mindframe, there's still exchange, and we can assume that both parties are better off by definition, otherwise they wouldn’t have made the trade. We don’t locate the problem of rents in the fact that people will pay too much for a phone, or for land, or for something with extensive copyright. And we also don’t think the fact that people are willing to pay a higher price is, by itself, sufficient justification for those rents. The problem is that one person -- the patent holder, the phone company, the land holder, etc. -- is collecting income that he or she shouldn’t.

    To phrase that a different way, the fact that people are willing to pay rents doesn’t justify someone’s ability to collect rents. If you are willing to pay everything you have for a medical drug that costs 5 cents, but it is being priced at a high level due to patent law, your desire to pay doesn’t, by itself, justify the company's profit levels.

    But one of the most famous examples of libertarian thought thinks your desire to pay does in fact justify the rents. Let’s look at the Wilt Chamberlain example from Robert Nozick’s Anarchy, State, and Utopia.

    In this example, we start in a place called D1, where things are generally agreed upon to be just (whatever that definition may be). Then many people decide, voluntarily, to give Wilt Chamberlain their money to watch him play basketball, and he ends up with a lot of it. Can this state D2 be unjust? Nozick:

    If D1 was a just distribution, and people voluntarily moved from it to D2, transferring parts of their shares they were given under D1 (what was it for if not to do something with?), isn’t D2 also just? If the people were entitled to dispose of the resources to which they were entitled (under D1), didn’t this include their being entitled to give it to, or exchange it with, Wilt Chamberlain? Can anyone else complain on grounds of justice?

    Wilt Chamberlain’s income is justified on the grounds that people are willing to give him their resources.

    Thinking about rents forces us to break exchange into two steps. The first step is the right of someone to give away her resources however she sees fit. This doesn't raise any issues. We want people to have resources precisely because we want them to do what they want with them (“what was it for if not to do something with?”). However, that logic is snuck into doing the work of a second step, which is the right of someone to receive those resources. In the example, the right of someone to give something is doing the entirety of the work. It is presumed that someone giving something away builds in the right for the other to receive it.

    But when it comes to rents, there’s no reason to believe this is true. One can turn the intuitive nature of the exercise upside down. Imagine if you are drowning, and Wilt Chamberlain is walking by and asks for $250,000 to throw you a life preserver (an easy act that would only cost $1 of his time). You agreeing to pay him to save your life, which is a sensible action on your part, doesn't presume that him receiving that money must keep the same level of distributional justice. This same issue will extend to a portion of what you will spend buying a cell phone and a plan in a market dominated by a few monopolistic players with extensive legal protections.

    So where do we draw the line on rents, and what are the appropriate responses? Is receiving a major inheritance a form of rent? Land? Genetic endowments? Perhaps it is best for long-term growth to keep value with the owner, at least for a period, as many argue for copyright and patent. Maybe, like those following Henry George would argue, taxes are the appropriate response. Or maybe there should be active work to try and ensure fewer rents accrue in the first place. But the key thing to remember is that the answers to these questions won't be answered through abstract ideals of liberty, or pointing to the market itself, but instead can only be answered through democratic accountability.

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    I wrote a piece at Wonkblog over the weekend about economic rents and the possibilities and limitations of conservatives and liberals coming together to tackle them. The issue of combating rents is interesting because it pushes against an argument that is taken to be a common sense and intuitive example of libertarian thought: the Wilt Chamberlain example. Looking at that example might help us understand some interesting issues about rent income. (This argument is taken from an excellent paper on the topic by Barbara Fried. If this blog does nothing but create a bigger audience for Fried's work, as well as Robert Hale's, I'll call it a huge win.)

    Let’s take your favorite example of rent income. Perhaps it is excessive copyright, criminal sanctions for unlocking your phone, zoning regulations that protect incumbent interests, live-saving drugs that are rationed above a market-clearing price due to patents, utilities that go unregulated, or something else.

    What’s the problem with these situations? At least some of the problem is distributional. People who collect income and wealth off of rents are collecting money that they don’t deserve. Nobody would think the problem of economic rents is that people are willing to pay them. In these situations, people are still buying and selling things. Slipping into a classically liberal mindframe, there's still exchange, and we can assume that both parties are better off by definition, otherwise they wouldn’t have made the trade. We don’t locate the problem of rents in the fact that people will pay too much for a phone, or for land, or for something with extensive copyright. And we also don’t think the fact that people are willing to pay a higher price is, by itself, sufficient justification for those rents. The problem is that one person -- the patent holder, the phone company, the land holder, etc. -- is collecting income that he or she shouldn’t.

    To phrase that a different way, the fact that people are willing to pay rents doesn’t justify someone’s ability to collect rents. If you are willing to pay everything you have for a medical drug that costs 5 cents, but it is being priced at a high level due to patent law, your desire to pay doesn’t, by itself, justify the company's profit levels.

    But one of the most famous examples of libertarian thought thinks your desire to pay does in fact justify the rents. Let’s look at the Wilt Chamberlain example from Robert Nozick’s Anarchy, State, and Utopia.

    In this example, we start in a place called D1, where things are generally agreed upon to be just (whatever that definition may be). Then many people decide, voluntarily, to give Wilt Chamberlain their money to watch him play basketball, and he ends up with a lot of it. Can this state D2 be unjust? Nozick:

    If D1 was a just distribution, and people voluntarily moved from it to D2, transferring parts of their shares they were given under D1 (what was it for if not to do something with?), isn’t D2 also just? If the people were entitled to dispose of the resources to which they were entitled (under D1), didn’t this include their being entitled to give it to, or exchange it with, Wilt Chamberlain? Can anyone else complain on grounds of justice?

    Wilt Chamberlain’s income is justified on the grounds that people are willing to give him their resources.

    Thinking about rents forces us to break exchange into two steps. The first step is the right of someone to give away her resources however she sees fit. This doesn't raise any issues. We want people to have resources precisely because we want them to do what they want with them (“what was it for if not to do something with?”). However, that logic is snuck into doing the work of a second step, which is the right of someone to receive those resources. In the example, the right of someone to give something is doing the entirety of the work. It is presumed that someone giving something away builds in the right for the other to receive it.

    But when it comes to rents, there’s no reason to believe this is true. One can turn the intuitive nature of the exercise upside down. Imagine if you are drowning, and Wilt Chamberlain is walking by and asks for $250,000 to throw you a life preserver (an easy act that would only cost $1 of his time). You agreeing to pay him to save your life, which is a sensible action on your part, doesn't presume that him receiving that money must keep the same level of distributional justice. This same issue will extend to a portion of what you will spend buying a cell phone and a plan in a market dominated by a few monopolistic players with extensive legal protections.

    So where do we draw the line on rents, and what are the appropriate responses? Is receiving a major inheritance a form of rent? Land? Genetic endowments? Perhaps it is best for long-term growth to keep value with the owner, at least for a period, as many argue for copyright and patent. Maybe, like those following Henry George would argue, taxes are the appropriate response. Or maybe there should be active work to try and ensure fewer rents accrue in the first place. But the key thing to remember is that the answers to these questions won't be answered through abstract ideals of liberty, or pointing to the market itself, but instead can only be answered through democratic accountability.

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  • How Congress and the Courts Are Closing in on Dodd-Frank

    Apr 4, 2013Mike Konczal

    What are the serious threats to Dodd-Frank? Last month, Haley Sweetland Edwards wrote "He Who Makes the Rules" at the Washington Monthly, which is the best single piece on Dodd-Frank implementation I've seen. In it, she identifies "three main areas on this gauntlet where a rule can be sliced, diced, gouged, or otherwise weakened beyond recognition." The first is "the agency itself, where industry lobbyists enjoy outsized influence in meetings and comment letters, on rule makers’ access to vital information, and on the interpretation of the law itself." The second is the courts, "where industry groups can sue an agency and have a rule killed on a variety of grounds." And the third is Congress, "where an entire law can be retroactively gutted or poked through with loopholes."

    How important have those three areas been? Looking at the first two and a half years of Dodd-Frank, the courts turned out to be the unexpected danger for financial reform. I have a piece in Bloomberg View today arguing this, as well as the fact that the courts are structurally biased against reform in some very crucial ways.

    That's not to say the lobbying battle is going well. But when the bill passed, people understood that rulewriting would be a difficult battle, and some groups like Americans for Financial Reform and Better Markets could at least help balance the lobbying efforts of financial industry groups. What was less understood was that the D.C. Circuit Court would have so many vacancies, and thus tilted to the far right and a radical agenda. I hope you check out the piece.

    But what about Congress? Erika Eichelberger at Mother Jones has an excellent piece about the ongoing, now biparistan, efforts to roll back parts of Dodd-Frank's derivative regulations that are starting up in the House Agriculture Committee. (I wrote about this effort for Wonkblog here.) This third area Edwards identifies, Congress, is only now becoming a serious battlefield. But isn't the timing off? President Obama and the Democrats lost in 2010 but won in 2012. Yet while the threat of Congress rolling back Dodd-Frank, one of President Obama's major achievements, with new bills wasn't on the radar in 2011, it may be in 2013. Isn't that backwards?
     
    Part of the answer is that the rules are becoming clearer, so financial industry lobbyists have more concrete targets to bring to Congress. But there's a political dimension as well. The general shutdown and polarization that dominated Congress after 2010 made a congressional threat to Dodd-Frank less likely. And ironically, the rise of the Tea Party within the conservative movement, even with its anti-Obama and anti-regulatory zeal, made bills to weaken Dodd-Frank less likely to pass. One reason is that the Tea Party wanted a full repeal of the bill or to gut entire sections, rather than more targeted interventions. Another is that the biggest losers in the 2010 shellacking were centrist “new Democrats,” those that would be more responsive to the needs of the financial industry than the progressive caucus that gained in relative strength afterwards.
     
    It’s possible many more centrist Democrats could have moved a bill through Congress weakening Dodd-Frank as it was being implemented, especially if conservatives were looking to compromise. But remaining centrist Democrats were not going to remove the FDIC's new resolution authority to end Too Big To Fail, which is what the Ryan budget calls for, or knee-cap the CFPB out the door, which is what the Senate GOP wants in exchange for nominating a director, or vote to repeal the bill in its entirety, which was a litmus test for the 2012 GOP presidental candidates. Especially after they just took a lot of heat to pass the bill. Deficit hysteria was the only thing that got momentum, with both parties doing serious damage by cutting the budget of the CFTC.
     
    (The unpopularity of the financial industry probably didn't help either. The congressional change that the financial industry most wanted, the delay of a rule designed to limit the interchange fees associated with debit cards, failed to clear 60 votes in the Senate.)
     
    Now that the GOP is realizing that Dodd-Frank is here to stay, we might see more effort to reach across the aisle to dismantle smaller pieces of it in accordance with what the financial industry wants. Health care is facing a similar situation, where conservatives policy entrepreneurs are currently debating whether or not to work within the framework of Obamacare or continue trying to repeal it. Sadly, conservatives will probably do far more damage if they get to the point of accepting that Dodd-Frank is the law of the land and try to do more targeted repeals rather than wage all-out war.
     
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    What are the serious threats to Dodd-Frank? Last month, Haley Sweetland Edwards wrote "He Who Makes the Rules" at the Washington Monthly, which is the best single piece on Dodd-Frank implementation I've seen. In it, she identifies "three main areas on this gauntlet where a rule can be sliced, diced, gouged, or otherwise weakened beyond recognition." The first is "the agency itself, where industry lobbyists enjoy outsized influence in meetings and comment letters, on rule makers’ access to vital information, and on the interpretation of the law itself." The second is the courts, "where industry groups can sue an agency and have a rule killed on a variety of grounds." And the third is Congress, "where an entire law can be retroactively gutted or poked through with loopholes."

    How important have those three areas been? Looking at the first two and a half years of Dodd-Frank, the courts turned out to be the unexpected danger for financial reform. I have a piece in Bloomberg View today arguing this, as well as the fact that the courts are structurally biased against reform in some very crucial ways.

    That's not to say the lobbying battle is going well. But when the bill passed, people understood that rulewriting would be a difficult battle, and some groups like Americans for Financial Reform and Better Markets could at least help balance the lobbying efforts of financial industry groups. What was less understood was that the D.C. Circuit Court would have so many vacancies, and thus tilted to the far right and a radical agenda. I hope you check out the piece.

    But what about Congress? Erika Eichelberger at Mother Jones has an excellent piece about the ongoing, now biparistan, efforts to roll back parts of Dodd-Frank's derivative regulations that are starting up in the House Agriculture Committee. (I wrote about this effort for Wonkblog here.) This third area Edwards identifies, Congress, is only now becoming a serious battlefield. But isn't the timing off? President Obama and the Democrats lost in 2010 but won in 2012. Yet while the threat of Congress rolling back Dodd-Frank, one of President Obama's major achievements, with new bills wasn't on the radar in 2011, it may be in 2013. Isn't that backwards?
     
    Part of the answer is that the rules are becoming clearer, so financial industry lobbyists have more concrete targets to bring to Congress. But there's a political dimension as well. The general shutdown and polarization that dominated Congress after 2010 made a congressional threat to Dodd-Frank less likely. And ironically, the rise of the Tea Party within the conservative movement, even with its anti-Obama and anti-regulatory zeal, made bills to weaken Dodd-Frank less likely to pass. One reason is that the Tea Party wanted a full repeal of the bill or to gut entire sections, rather than more targeted interventions. Another is that the biggest losers in the 2010 shellacking were centrist “new Democrats,” those that would be more responsive to the needs of the financial industry than the progressive caucus that gained in relative strength afterwards.
     
    It’s possible many more centrist Democrats could have moved a bill through Congress weakening Dodd-Frank as it was being implemented, especially if conservatives were looking to compromise. But remaining centrist Democrats were not going to remove the FDIC's new resolution authority to end Too Big To Fail, which is what the Ryan budget calls for, or knee-cap the CFPB out the door, which is what the Senate GOP wants in exchange for nominating a director, or vote to repeal the bill in its entirety, which was a litmus test for the 2012 GOP presidental candidates. Especially after they just took a lot of heat to pass the bill. Deficit hysteria was the only thing that got momentum, with both parties doing serious damage by cutting the budget of the CFTC.
     
    (The unpopularity of the financial industry probably didn't help either. The congressional change that the financial industry most wanted, the delay of a rule designed to limit the interchange fees associated with debit cards, failed to clear 60 votes in the Senate.)
     
    Now that the GOP is realizing that Dodd-Frank is here to stay, we might see more effort to reach across the aisle to dismantle smaller pieces of it in accordance with what the financial industry wants. Health care is facing a similar situation, where conservatives policy entrepreneurs are currently debating whether or not to work within the framework of Obamacare or continue trying to repeal it. Sadly, conservatives will probably do far more damage if they get to the point of accepting that Dodd-Frank is the law of the land and try to do more targeted repeals rather than wage all-out war.
     
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