Live at TNR: Dodd-Frank at Year Four

Jul 23, 2014Mike Konczal

Live at The New Republic, I have a piece describing Year Four of Dodd-Frank, which celebrates its birthday this week. The news coverage of the past year has had a "stuck, spinning its wheels" argument to it. I argue that this past year saw some major and important advancements, directions on where to go next, and also made what will be the biggest challenges going forward very clear. I hope you check it out.

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Live at The New Republic, I have a piece describing Year Four of Dodd-Frank, which celebrates its birthday this week. The news coverage of the past year has had a "stuck, spinning its wheels" argument to it. I argue that this past year saw some major and important advancements, directions on where to go next, and also made what will be the biggest challenges going forward very clear. I hope you check it out.

Follow or contact the Rortybomb blog:
 
  

 

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Daily Digest - July 23: It's Been a Good Year for Financial Reform

Jul 23, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Ignore the Naysayers: Dodd-Frank Reforms Are Finally Paying Off (TNR)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Ignore the Naysayers: Dodd-Frank Reforms Are Finally Paying Off (TNR)

The past year has seen important successes, like higher capital requirements, writes Roosevelt Institute Fellow Mike Konczal, and the next steps for financial reform are getting clearer.

We’re Arresting Poor Mothers for Our Own Failures (The Nation)

Bryce Covert points to the policy failures of welfare reform, which requires parents to work or look for work to receive benefits but hasn't provided for child care, leading to recent high-profile arrests.

Obama to Sign Bill Improving Worker Training (Time)

In the first significant legislative reform to job training in a decade, Maya Rhodan says the Obama administration and Congress put training programs on a more forward-looking path.

SEC Is Set to Approve Money-Fund Rules (WSJ)

The new rules target institutional investors over individuals, says Andrew Ackerman, aiming to train investors to accept fluctuations and prevent panicked mass sell-offs.

TaskRabbit Redux (New Yorker)

Adrienne Raphel writes that TaskRabbit's recent relaunch makes it more clear that for all their marketing, online tools for hiring labor or transportation are about commerce, not community.

New on Next New Deal

Dr. Strangelove and the Halbig Decision

Roosevelt Institute Fellow Mike Konczal points out the fallacy in right-wing claims that there is a "doomsday machine" in the Affordable Care Act: doomsday machines only work if you tell people about them.

Full-Time Employment May Give Way to a Free Agent Economy

In his speculation on the future for the Next American Economy project, Carl Camden, CEO of Kelly Services, suggests that temporary employment firms like his will become the purveyors of social services.

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What Will the American Economy Look Like 26 Years From Today?

Jul 21, 2014Bo Cutter

Earlier this summer, the Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Find out what they had to say.

Participants in our recent convening speculated:

Earlier this summer, the Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Find out what they had to say.

Participants in our recent convening speculated:

“The post-WWII model of full-time, permanent employment proved itself the historical aberration we predicted: in 2040, only 12 percent of the American workforce is directly employed by corporate enterprises or government departments, and the average length of time spent on any one job is under six months.”

“New platforms and services will spring up to solve the problems of the micro-gig economy using distributed, peer-to-peer models of social insurance that will be hyper-local, but not based on geography. They will be based on the micro-niche identities that we build online -- accountants for bacon. Latinos who play Dungeons & Dragons. What have you.”  

“In the late '20s, the Know Everything Party assumed their final national political victories of mandating every American household be limited to three robots, one 3D printer, and own a minimum of three guns would be enough to secede and be left alone. After 15 years of explosive growth in income and wealth inequality, unimaginable to us in 2014, it all came to a head in our second Civil War, or what historians are calling the Bloodless War.”

Guided by the belief that we are on the precipice of fundamental and lasting economic change, the Next American Economy project gathered a group of 30 academics, business leaders, organizers, and technologists, and asked them to envision the long-term economic and political future of the United States. We gave our participants free rein to be bold in their speculations – to deviate from data, the conventional wisdom, or even their own expert opinions. The goal was not to predict the future, but to debate a series of critical questions: (a) Are we at an inflection point in the nature of innovation and technological change? (b) How will the rise of cities change the geography of economic activity? (c) How will economic trends alter the nature of work and employment? (d) Is the trend of widening income inequality likely to continue or stagnate?

What followed was a series of prescient, thoughtful, and often hilarious three- to four-minute speculations on topics ranging from the gig economy to the future of finance, from imminent civil war to the transformation of Google into a car company, and many more. Each speculation on its own could foster a day of debate and a sea of responses. For this reason, we will release one video speculation a day for the next three weeks, starting with David Autor’s description of economic polarization.

Our recent meeting was a first step toward our broader goal of identifying the trends likely to shape the future in order to identify the policy interventions needed to ensure the best possible outcome. The group identified key topics for further investigation and also found some areas of broad consensus.

  • 79 percent of participants believe “technological change will persist and will be big enough to disrupt business-as-usual."

  • 42 percent believe “a new paradigm of work is emerging and will change the nature of jobs for a large percentage of the population” and an additional 29 percent believe “a new paradigm has already emerged and you East Coast intellectuals are way behind the times.”

  • A total of 74 percent believe that even if an entrepreneurship booms leads to productivity growth it will not lead to job creation.

  • Nearly half (48 percent) believe that if inequality trends continue, the political backlash will be so extreme that our current system will change drastically in the next 25 years.

You can learn more about our project and find our forthcoming research on our website.

Roosevelt Institute Senior Fellow Bo Cutter is Director of the Next American Economy project. He was formerly a managing partner of Warburg Pincus, a major global private equity firm, and served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

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Daily Digest - July 8: Will the Stock Market Boom Be a Bust for the Economy?

Jul 8, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Stiglitz: I'm 'very uncomfortable' with current stock levels (CNBC)

Roosevelt Institute Chief Economist Joseph Stiglitz emphasizes the difference between a strong stock market and overall economic strength, reports Antonia Matthews.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Stiglitz: I'm 'very uncomfortable' with current stock levels (CNBC)

Roosevelt Institute Chief Economist Joseph Stiglitz emphasizes the difference between a strong stock market and overall economic strength, reports Antonia Matthews.

Union Wins $15 Minimum Wage for L.A. Schools' Service Workers (LA Times)

Howard Blume says the school board's unanimous approval of higher wages shows the growing power of the service workers' unions in Los Angeles, where many union members are also parents.

Why the Supreme Court’s Attack on Labor Hurts Women Most (The Nation)

Michelle Chen argues that limiting home health care workers' ability to organize will prevent many others in low-wage domestic work, primarily women, from improving working conditions.

  • Roosevelt Take: Roosevelt Institute Senior Fellow Richard Kirsch looks at the challenges presented by the Harris v. Quinn ruling.

Conservatives Say Cutting Unemployment Benefits Boosted the Jobs Numbers. This Chart Says Otherwise. (TNR)

Long-term unemployment is still falling at the same slow-and-steady pace as the past few years, writes Danny Vinik, indicating no link to the end of extended unemployment benefits.

Left Pushes Regulators to Lift Curtain on CEO Pay (The Hill)

Labor unions and other interest groups fear that upcoming regulations that require companies to disclose CEO-to-median-worker pay ratios will be diluted, says Megan R. Wilson.

Democrats Can Win with Populism — If They Play it Right (WaPo)

New polling data shows that many voters associate the Republican Party with big business and the wealthy, which Aaron Blakes sees as a key strategic point for Democrats in 2014.

Three Paths to Full Employment (AJAM)

Dean Baker's suggestions include increased government spending, as in the New Deal; reducing the trade deficit; and reducing the supply of labor with policies that push employers to hire more people.

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Daily Digest - June 26: People Awaken to Find Wall Street is a Crooked Road

Jun 26, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Wall Street and Washington Want You to Believe the Stock Market isn't Rigged. Guess What? It Still Is (The Guardian)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Wall Street and Washington Want You to Believe the Stock Market isn't Rigged. Guess What? It Still Is (The Guardian)

Heidi Moore says investment in the stock market isn't down due to low investor confidence, but because more people are realizing the system isn't equal for all investors.

A Cure for Bloated CEO pay (Fortune)

Dean Baker proposes a "Director's Roulette" provision, which would withhold directors' compensation if a CEO pay package they approve had been voted down by a shareholder Say-on-Pay vote.

  • Roosevelt Take: Roosevelt Institute Fellow and Director of Research Susan Holmberg examines how Say-on-Pay begins to curb executive compensation.

Why did the White House Pass Up an Opportunity to Support a (Mostly) Good, Bipartisan Idea? (WaPo)

The White House rejected the proposed gas tax, needed to save the Highway Trust Fund that pays for infrastructure, but Jared Bernstein says an imperfect fix would have been better than nothing.

How the Government Subsidizes Wealth Inequality (CAP)

Harry Stein proposes that the U.S. government could reduce wealth inequality simply by changing tax policy for capital gains, since current subsidies give $2 trillion to the wealthy over 10 years.

How Connecticut’s Smart New Pension Plan Can Prevent Poverty in Retirement (The Nation)

Connecticut's new plan, which offers statewide benefits to private sector workers, will cost less than helping greater numbers of elderly poor down the line, writes Michelle Chen.

Ikea Plans to Increase Minimum Hourly Pay (NYT)

Steven Greenhouse reports on Ikea's new wage structure, which sets minimum wages on a store-by-store basis based on local cost of living, with an average minimum wage of $10.76.

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Daily Digest - June 16: Oakland's Minimum Wage Workers Could Win in November

Jun 16, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our Monday through Friday morning email featuring the Daily Digest.

New Study Shows Who Wins if Oakland Hikes Minimum Wage (San Francisco Business Times)

Click here to subscribe to Roosevelt First, our Monday through Friday morning email featuring the Daily Digest.

New Study Shows Who Wins if Oakland Hikes Minimum Wage (San Francisco Business Times)

Eric Young reports on a study coauthored by Roosevelt Institute Fellow Annette Bernhardt, which shows 48,000 workers could benefit if Oakland approves a $12.25 minimum wage.

GOP Doesn’t Waste Time Blaming Obama for Iraq (Melissa Harris-Perry)

Roosevelt Institute Fellow Dorian Warren says Republicans are using current events in Iraq to attempt to shift responsibility for the war off of President Bush and onto Democrats.

A Civilized Critic of Savage Behavior - Robert Johnson on Reality Asserts Itself (Real News Network)

Roosevelt Institute Senior Fellow Robert Johnson explains how his critique of the financial sector developed as Wall Street's political power grew and risk was shifted onto the public.

The Many Pipelines That Pump Up Our Wealth (Truth-Out)

Citing William Lazonick's new Roosevelt Institute white paper and two other studies on corporate pay practices, Sam Pizzigati sees a need for serious policy shifts to fight inequality.

  • Roosevelt Take: Lazonick's paper focuses on stock buybacks, which inflate the value of CEOs' stock-based performance pay.

Bank Account Screening Tool Is Scrutinized as Excessive (NYT)

Jessica Silver-Greenberg and Michael Corkery report on the New York Attorney General's efforts to ensure that a private bank database does not improperly deny banking access.

Starbucks Will Pay Full College Tuition For Thousands Of Its Workers (Business Insider)

Many Starbucks employees will be eligible for full tuition coverage for online studies at Arizona State University, writes Rob Wile. For low-wage service jobs, that's a very rare perk.

Hell on Wheels (TNR)

David Dayen looks at how current workplace conditions incentivize truckers to bend the rules and drive through fatigue while the industry lobbies against any work-hour regulation.

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Daily Digest - June 11: Sprint's Big Deal Leaves Customers With Little Choice

Jun 11, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our Monday through Friday morning email featuring the Daily Digest.

Don't Let Sprint Buy T-Mobile (Bloomberg View)

Roosevelt Institute Fellow Susan Crawford says that allowing Sprint to buy its way to a higher share of the cell phone market won't improve service for customers.

Click here to subscribe to Roosevelt First, our Monday through Friday morning email featuring the Daily Digest.

Don't Let Sprint Buy T-Mobile (Bloomberg View)

Roosevelt Institute Fellow Susan Crawford says that allowing Sprint to buy its way to a higher share of the cell phone market won't improve service for customers.

Goldman Sachs CEO: “Income Inequality Is A Very Destabilizing Thing In The Country” (Buzzfeed)

Matthew Zeitlin reports on Lloyd Blankfein's CBS interview, in which he said that too much growth has gone to too few people. Zeitlin notes that Blankfein was paid $23 million in 2013.

  • Roosevelt Take: In his white paper for the Roosevelt Institute, William Lazonick looks at how high executive pay destabilizes the economy.

Markets Are Less Volatile. Should We Worry? (NYT)

Even if more stable markets are encouraging investors to take on more risk, Neil Irwin says that the Federal Reserve should stay on its slow-and-steady path.

Cities Are Passing Higher Minimum Wages – and Leaving the Suburbs Further Behind (WaPo)

Emily Badger looks at current debates about cities and suburbs with different minimum wages: how many workers will bring their higher wages home to the suburbs, and will the jobs move out?

Wall Street's Virus Has Infected Your College Debt, and Obama's Doing Zero (The Guardian)

Heidi Moore asks why the President isn't doing anything about private student debt, which has little regulation and could pose a greater threat to the economy than public loans.

The Mental-Health Consequences of Unemployment (The Atlantic)

A new Gallup poll shows that the unemployed have much higher rates of depression than those with jobs, reports Rebecca J. Rosen, and it's easy to see how depression could affect a job search.

New on Next New Deal

Healing the Medical Field: How A Push Against Careers in Medicine Could Push Back on Burnout

Roosevelt Institute | Campus Network Senior Fellow for Health Care Anisha Hegde writes that by speaking out about burnout in their jobs, doctors can create an opportunity for sustainable change.

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The New Conservative Reformers Still Don't Have a Plan for Wall Street

May 23, 2014Mike Konczal

There’s a certain liberal fascination with the idea of conservative “reformers” showing up and recalibrating the Republican Party toward policies that would benefit working Americans and lead to potential bipartisan solutions. This fascination is on display in the reaction to the new Room to Grow report, available for free online, by the YG Network. Already being covered by liberals, this volume features various reform conservative writers addressing a range of innovative economic policy ideas, with the hope that Republicans lawmakers will pay attention.

But if this is the best the new wave of conservatives can do on financial reform, it’s probably not the biggest worry that elected Republicans aren’t listening. The chapter that focuses on Dodd-Frank and the regulation of the financial markets after the crisis is by American Enterprise Institute’s James Pethokoukis. It’s billed as “financial reforms to combat cronyism,” but it offers little in terms of reform. The reformers should, at the very least, explain what they would repeal or replace in Dodd-Frank (a tension that exists with Obamacare as well), and this is left unclear.

The problems start with Pethokoukis’s take on the story of what went wrong in the first place. But he also glosses over the key issues facing policymakers today. The general idea of attacking “cronyism” and promoting competition tells us nothing about what needs to be done, making it so this report is a poor guide to the actual ongoing debates happening in financial reform. And this silence on contentious matters is so deafening that it bodes poorly for any kind of genuine positive agenda for the right or bipartisan alignment with liberal reformers. Understanding where Pethokoukis goes wrong, however, can tell us why conservatives are going to have a hard time dealing with actual reform in the age of Dodd-Frank.

The Story of What Went Wrong

For Pethokoukis, a lack of competition in the financial markets led to the crisis of 2008. To whatever extent there were problems, those problems existed because of the government’s safety net and backstopping of deposits and commercial banks.

A quick glance at most accounts of the financial crisis argues otherwise. The whole point of deregulation in the financial markets was to increase competition. The book that made the case for repealing Glass-Steagall argued for “an enhanced role for competition.” Economists associated with the Clinton administration also believed deregulation would lead to more competition and fix the financial sector. There was an explicit assumption that private entities like the ratings agencies would act as better regulators because they faced competition, and they explain how those agencies became so pivotal to the entire system.

So what went wrong? All these new types of “shadow” banks turned out to have the same problems as any other banking sector. They had massive conflicts of interest, were capable of generating panics and runs with no lender-of-last-resort to fall back on, and there were no regulatory tools to wind them down. The goal of Dodd-Frank, in this version of the story, is to extend the core, tried-and-tested methods of financial reform to this shadow banking sector. Under these new regulations, the FDIC can take down shadow banks, derivatives have to be traded in an exchange, the CFPB provides transparency and accountability for consumers, and so on. Perhaps this narrative is wrong, or perhaps these are terrible policy goals that follow from it, but it goes entirely undiscussed in Pethokoukis’s account.

No Conservative Answer to Too Big To Fail

The problems become more obvious when you consider two of the most debated parts of Dodd-Frank: the FDIC’s ability to create a death panel for failing banks, known as resolution authority; and the Federal Reserve’s power to act as a “lender of last resort” in periods of crisis. Pethokoukis only obliquely addresses these issues, though they go to the core of Too Big To Fail.

He argues that Dodd-Frank “explicitly permits bailouts through its resolution authority provision.” What he is referencing is sadly not cited, because Dodd-Frank in fact requires "that unsecured creditors bear losses in accordance with the priority of claim.” (If Pethokoukis would argue that the power to differentiate payments is a de facto bailout, then all of bankruptcy is a permanent bailout, as those powers look just like critical vendor orders or other parts of the bankruptcy process in the proposed FDIC rules.)

Pethokoukis also argues against any type of lender-of-last-resort functionality for the non-commercial banking sector. Awkwardly, this in turn functions as a defense of the 2007 status quo. Take an investment bank, allow it to be subject to market panics, and have no resolution process in place other than tossing it into bankruptcy. This is the exact experiment we did with Lehman Brothers.

In supporting materials, Pethokoukis argues that conservative reformers “have ideas to end Too Big To Fail once and for all,” but it’s not clear what they actually are, or even what they could look like. He doesn’t engage in the debate over resolution authority, and he doesn’t mention various conservative replacements to Dodd-Frank that involve a special bankruptcy code. Maybe that’s because the leading proposals make it purposely difficult to lend in a crisis by penalizing lenders, an approach that violates the wisdom of economists going back to Bagehot.

Not a Roadmap for Our Current Debates

Now granted, the report is about messaging and priorities rather than the intricacies of specific reforms. But even here Pethokoukis’s general guiding star of pro-competition and anti-cronyism doesn’t tell us anything about what we need to know to assess the problems on the ground.

Derivative reforms are notably missing from this paper. I’d argue that forcing price transparency in the derivatives market is pro-competition because it leads to better information and an even playing field, and that pushing for aggressive international enforcement of those rules is anti-cronyism, because Wall Street shouldn’t get to flout the rules by cleverly housing its operations somewhere. Would conservative reformers agree? Based on this report, I have no idea.

Is the fact that Wall Street has such an extensive presence in commodities like aluminum a cause for concern? Do we want to push back on the market mediated complex credit chains that comprise shadow banking? Did Dodd-Frank not go far enough in restructuring the financial system, or did it already go too far with the Volcker Rule and concentration limits? The fact that the conservative reformers’ framework is incapable of guiding us in any plausible direction on these major unfolding issues is very problematic. It points to an absolute void in reform conservative policy on the practical regulatory challenges of the day.

The most promising thing in Pethokoukis’s piece is the call for higher capital requirements, perhaps on the order of 15 percent. Though a very good idea, this won’t end Too Big To Fail. And again this doesn’t engage with the current debates over capital, which involve how to balance multiple needs of capital. If you have a straight leverage requirement by itself, won’t that be gamed by firms taking on big risks? If you have a lot of capital but no liquidity, won’t you be subject to runs? Should banks hold long-term, unsecured debt, perhaps engineered to turn into equity during a failure? People often seek a silver bullet here, but one of the points of Basel is to try and balance all these needs against each other. Pethokoukis is correct that requirements should be higher, but unclear on this balancing act.

Mediating Institutions Require Regulations

Capital requirements aside, it’s surprising how unsurprised I am by the supposedly bold new thinking on financial reform contained in this report. The report is ideologically focused on using the government to build the spaces between the individual and state, the space of mediating institutions that include the market. But one of the best ways we can do that is by enforcing transparency and accountability among people participating in a market. Indeed, arguably the biggest blow to cronyism in 2014 has been the disclosure by the SEC of serious, widespread breaches in the private equity market – breaches that are reportable because of Dodd-Frank.

Here’s an example of a policy I’d love to see the right embrace: fiduciary requirements updated for a landscape of 401(k)s, IRAs, and all the other personal, private, tax-exempt savings accounts that people have to deal with. The Department of Labor is trying to do this right now, in fact, and the House Tea Party is trying to stop them.

One might expect that conservatives thinking in terms of civil society would support fiduciary requirements. They’ve existed since antiquity, going back to the Code of Hammurabi, Judeo-Christian traditions, Chinese law, and, a bonus for the right, centuries of common law. Using the state to set a guidepost for ethical norms that have existed across time and place, and thereby boosting people’s ability to take responsibility for their investments, is remarkably consistent with a richer civil society. But it’s not there in this report.

I hope these reformers succeed in checking the furthest right-wing elements of their party, although the rehabilitation of Bush-era “compassionate conservatism” (a term whose absence is conspicuous) is a far heavier lift given the libertarian focus of today’s conservatism. But if this vision is going to be centered on mediating institutions rather than direct state action, it will be essential for reformers to understand how the state creates the market, and how it sets the terms for enforcing consumers interests, for private agents to get access to information, and for trading, prices, and risk to move throughout the economy. The core balance of transparency, accountability, stability, and innovation is not something that can simply be waved away by appeals to a “free” market as is done here.

Follow or contact the Rortybomb blog:
  

 

There’s a certain liberal fascination with the idea of conservative “reformers” showing up and recalibrating the Republican Party toward policies that would benefit working Americans and lead to potential bipartisan solutions. This fascination is on display in the reaction to the new Room to Grow report, available for free online, by the YG Network. Already being covered by liberals, this volume features various reform conservative writers addressing a range of innovative economic policy ideas, with the hope that Republicans lawmakers will pay attention.

But if this is the best the new wave of conservatives can do on financial reform, it’s probably not the biggest worry that elected Republicans aren’t listening. The chapter that focuses on Dodd-Frank and the regulation of the financial markets after the crisis is by American Enterprise Institute’s James Pethokoukis. It’s billed as “financial reforms to combat cronyism,” but it offers little in terms of reform. The reformers should, at the very least, explain what they would repeal or replace in Dodd-Frank (a tension that exists with Obamacare as well), and this is left unclear.

The problems start with Pethokoukis’s take on the story of what went wrong in the first place. But he also glosses over the key issues facing policymakers today. The general idea of attacking “cronyism” and promoting competition tells us nothing about what needs to be done, making it so this report is a poor guide to the actual ongoing debates happening in financial reform. And this silence on contentious matters is so deafening that it bodes poorly for any kind of genuine positive agenda for the right or bipartisan alignment with liberal reformers. Understanding where Pethokoukis goes wrong, however, can tell us why conservatives are going to have a hard time dealing with actual reform in the age of Dodd-Frank.

The Story of What Went Wrong

For Pethokoukis, a lack of competition in the financial markets led to the crisis of 2008. To whatever extent there were problems, those problems existed because of the government’s safety net and backstopping of deposits and commercial banks.

A quick glance at most accounts of the financial crisis argues otherwise. The whole point of deregulation in the financial markets was to increase competition. The book that made the case for repealing Glass-Steagall argued for “an enhanced role for competition.” Economists associated with the Clinton administration also believed deregulation would lead to more competition and fix the financial sector. There was an explicit assumption that private entities like the ratings agencies would act as better regulators because they faced competition, and they explain how those agencies became so pivotal to the entire system.

So what went wrong? All these new types of “shadow” banks turned out to have the same problems as any other banking sector. They had massive conflicts of interest, were capable of generating panics and runs with no lender-of-last-resort to fall back on, and there were no regulatory tools to wind them down. The goal of Dodd-Frank, in this version of the story, is to extend the core, tried-and-tested methods of financial reform to this shadow banking sector. Under these new regulations, the FDIC can take down shadow banks, derivatives have to be traded in an exchange, the CFPB provides transparency and accountability for consumers, and so on. Perhaps this narrative is wrong, or perhaps these are terrible policy goals that follow from it, but it goes entirely undiscussed in Pethokoukis’s account.

No Conservative Answer to Too Big To Fail

The problems become more obvious when you consider two of the most debated parts of Dodd-Frank: the FDIC’s ability to create a death panel for failing banks, known as resolution authority; and the Federal Reserve’s power to act as a “lender of last resort” in periods of crisis. Pethokoukis only obliquely addresses these issues, though they go to the core of Too Big To Fail.

He argues that Dodd-Frank “explicitly permits bailouts through its resolution authority provision.” What he is referencing is sadly not cited, because Dodd-Frank in fact requires "that unsecured creditors bear losses in accordance with the priority of claim.” (If Pethokoukis would argue that the power to differentiate payments is a de facto bailout, then all of bankruptcy is a permanent bailout, as those powers look just like critical vendor orders or other parts of the bankruptcy process in the proposed FDIC rules.)

Pethokoukis also argues against any type of lender-of-last-resort functionality for the non-commercial banking sector. Awkwardly, this in turn functions as a defense of the 2007 status quo. Take an investment bank, allow it to be subject to market panics, and have no resolution process in place other than tossing it into bankruptcy. This is the exact experiment we did with Lehman Brothers.

In supporting materials, Pethokoukis argues that conservative reformers “have ideas to end Too Big To Fail once and for all,” but it’s not clear what they actually are, or even what they could look like. He doesn’t engage in the debate over resolution authority, and he doesn’t mention various conservative replacements to Dodd-Frank that involve a special bankruptcy code. Maybe that’s because the leading proposals make it purposely difficult to lend in a crisis by penalizing lenders, an approach that violates the wisdom of economists going back to Bagehot.

Not a Roadmap for Our Current Debates

Now granted, the report is about messaging and priorities rather than the intricacies of specific reforms. But even here Pethokoukis’s general guiding star of pro-competition and anti-cronyism doesn’t tell us anything about what we need to know to assess the problems on the ground.

Derivative reforms are notably missing from this paper. I’d argue that forcing price transparency in the derivatives market is pro-competition because it leads to better information and an even playing field, and that pushing for aggressive international enforcement of those rules is anti-cronyism, because Wall Street shouldn’t get to flout the rules by cleverly housing its operations somewhere. Would conservative reformers agree? Based on this report, I have no idea.

Is the fact that Wall Street has such an extensive presence in commodities like aluminum a cause for concern? Do we want to push back on the market mediated complex credit chains that comprise shadow banking? Did Dodd-Frank not go far enough in restructuring the financial system, or did it already go too far with the Volcker Rule and concentration limits? The fact that the conservative reformers’ framework is incapable of guiding us in any plausible direction on these major unfolding issues is very problematic. It points to an absolute void in reform conservative policy on the practical regulatory challenges of the day.

The most promising thing in Pethokoukis’s piece is the call for higher capital requirements, perhaps on the order of 15 percent. Though a very good idea, this won’t end Too Big To Fail. And again this doesn’t engage with the current debates over capital, which involve how to balance multiple needs of capital. If you have a straight leverage requirement by itself, won’t that be gamed by firms taking on big risks? If you have a lot of capital but no liquidity, won’t you be subject to runs? Should banks hold long-term, unsecured debt, perhaps engineered to turn into equity during a failure? People often seek a silver bullet here, but one of the points of Basel is to try and balance all these needs against each other. Pethokoukis is correct that requirements should be higher, but unclear on this balancing act.

Mediating Institutions Require Regulations

Capital requirements aside, it’s surprising how unsurprised I am by the supposedly bold new thinking on financial reform contained in this report. The report is ideologically focused on using the government to build the spaces between the individual and state, the space of mediating institutions that include the market. But one of the best ways we can do that is by enforcing transparency and accountability among people participating in a market. Indeed, arguably the biggest blow to cronyism in 2014 has been the disclosure by the SEC of serious, widespread breaches in the private equity market – breaches that are reportable because of Dodd-Frank.

Here’s an example of a policy I’d love to see the right embrace: fiduciary requirements updated for a landscape of 401(k)s, IRAs, and all the other personal, private, tax-exempt savings accounts that people have to deal with. The Department of Labor is trying to do this right now, in fact, and the House Tea Party is trying to stop them.

One might expect that conservatives thinking in terms of civil society would support fiduciary requirements. They’ve existed since antiquity, going back to the Code of Hammurabi, Judeo-Christian traditions, Chinese law, and, a bonus for the right, centuries of common law. Using the state to set a guidepost for ethical norms that have existed across time and place, and thereby boosting people’s ability to take responsibility for their investments, is remarkably consistent with a richer civil society. But it’s not there in this report.

I hope these reformers succeed in checking the furthest right-wing elements of their party, although the rehabilitation of Bush-era “compassionate conservatism” (a term whose absence is conspicuous) is a far heavier lift given the libertarian focus of today’s conservatism. But if this vision is going to be centered on mediating institutions rather than direct state action, it will be essential for reformers to understand how the state creates the market, and how it sets the terms for enforcing consumers interests, for private agents to get access to information, and for trading, prices, and risk to move throughout the economy. The core balance of transparency, accountability, stability, and innovation is not something that can simply be waved away by appeals to a “free” market as is done here.

Follow or contact the Rortybomb blog:
  

 

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Daily Digest - May 13: When Conservatism Becomes a Health Hazard

May 13, 2014

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How the Right Wing is Killing Women (Robert Reich)

Robert Reich uses Roosevelt Institute Senior Fellow Ellen Chelser and Fellow Andrea Flynn's paper on poverty and family planning to explain how conservative policy is increasing maternal mortality.

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How the Right Wing is Killing Women (Robert Reich)

Robert Reich uses Roosevelt Institute Senior Fellow Ellen Chelser and Fellow Andrea Flynn's paper on poverty and family planning to explain how conservative policy is increasing maternal mortality.

  • Roosevelt Take: Andrea Flynn also writes about The Lancet's findings on rising maternal mortality in a series for National Women's Health Week.

The SEC Has Revealed Astounding Corruption in Private Equity (TNR)

Roosevelt Institute Fellow Mike Konczal cites the Securities and Exchange Commission's investigations into private equity firms as an example of effective public regulation.

Airport Workers Press to Join a Union (WSJ)

Laura Kusito reports that workers at New York City airports have voted, via card check, to join a union as part of their ongoing fight for better wages and benefits.

The Minimum Wage Loophole That's Screwing Over Waiters and Waitresses (MoJo)

While the law requires that employers make up the difference if servers don't earn minimum wage though tips, Dana Liebelson reports that wage theft is common.

Tenures Becoming Shorter at a Short-Handed Fed (NYT)

Binyamin Appelbaum speculates that faster turnover at the Federal Reserve is due to changing demographics and expectations, more lucrative outside opportunities, and increased burnout.

The Problem with Thomas Piketty: “Capital” Destroys Right-Wing Lies, but There’s One Solution it Forgets (Salon)

Labor organizing is key to fighting inequality, says Thomas Frank, and while it's not a perfect solution to plutocracy, it's easier to implement than a global wealth tax.

New on Next New Deal

To Stop Campus Sexual Assault, We Should Study the Men Responsible

Roosevelt Institute Fellow Andrea Flynn and Women Rising Program Manager Nataya Friedan suggest that researching the perpetrators will provide guidance for how to reduce sexual violence.

Negotiating With Iran Should be the United States’ Foreign Policy Priority

Roosevelt Institute | Campus Network Senior Fellow for Defense and Diplomacy Jacqueline van de Velde argues that to maintain influence in the Middle East, the U.S. needs to open diplomatic relations with Iran.

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Daily Digest - May 7: What's Good for Business Can Be Bad for Local Economies

May 7, 2014Rachel Goldfarb

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Surprise! 'Pro-Business' Policies Hurt State Economic Growth (LA Times)

A University of Wisconsin professor has shown that business-friendly ALEC's rankings of state economic policies are good predictors of slow job growth, writes Michael Hiltzik.

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Surprise! 'Pro-Business' Policies Hurt State Economic Growth (LA Times)

A University of Wisconsin professor has shown that business-friendly ALEC's rankings of state economic policies are good predictors of slow job growth, writes Michael Hiltzik.

A Year After Being Discredited, Austerity Economics Still Reigns (AJAM)

Dean Baker says that despite knowing that Carmen Reinhart and Ken Rogoff were wrong about debt-to-GDP ratios and economic growth, governments haven't given up on austerity.

  • Roosevelt Take: Roosevelt Institute Fellow Mike Konczal was one of the first to write about the problems in the infamous Reinhart-Rogoff paper.

Study: RomneyCare Seems To Have Saved Lives, And Obamacare Could Too (TPM)

A new study shows that Massachusetts' mortality rate fell after it implemented health care reform, reports Dylan Scott. The study's authors say the same could happen nationally.

  • Roosevelt Take: Roosevelt Institute Senior Fellow Richard Kirsch says that in addition to data like this, stories about the ACA's success are key to building support.

SEC Finds High Rate of Fee, Expense Violations at Private-Equity Firms (WSJ)

More than half of the firms allocated their expenses or charged fees inappropriately, or even illegally, to boost profits, report Gillian Tan and Michael Wursthorn.

There’s Still No Reason to be Afraid of the Inflation Monster (WaPo)

Matt O'Brien writes that despite persistent fears, wages aren't rising and therefore aren't causing inflation. The real story is that wages are flat despite lower unemployment.

What Would Happen to Companies Like Target If They Paid $15 an Hour? (PolicyShop)

David Callahan considers the possible impact of a modern-day Henry Ford giving low-wage workers a big increase. He says it would boost the entire economy and that company's profits.

New on Next New Deal

Turning Students' Vision Into Reality: Roosevelt's Campus Network at 10

As the nation's largest student policy organization approaches its 10th anniversary, alumna and former staffer Tarsi Dunlop reflects on what it has accomplished and what's to come.

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