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April 5, 2010

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Paul Krugman: Making Financial Reform Fool-Resistant

Posted: 05 Apr 2010 01:26 AM PDT

Is financial reform legislation currently on the table sufficient to fill the "gaping hole" in regulatory oversight?:

Making Financial Reform Fool-Resistant, by Paul Krugman, Commentary, NY Times: The White House is confident that a financial regulatory reform bill will soon pass the Senate. I'm not so sure, given the opposition of Republican leaders... But in any case, how good is the legislation on the table, the bill put together by Senator Chris Dodd...?
Not good enough. ... Now, it's impossible to devise a truly foolproof regulatory regime — anyone who believes otherwise is underestimating the power of foolishness. But you can try to create a system that's relatively fool-resistant. Unfortunately, the Dodd bill doesn't do that.
As I argued in my last column,... the core problem with our financial system ... is ... that the current system doesn't limit risky behavior by "shadow banks," institutions — like Lehman Brothers — that ... are perfectly capable of creating a banking crisis, but ... face minimal oversight.
The Dodd bill tries to fill this gaping hole in the system by letting federal regulators impose "strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity." It also gives regulators the power to seize troubled financial firms — and it requires that large, complex firms submit "funeral plans" that make it relatively easy to shut them down.
That's all good. ... But ... everything is left at the discretion of the Financial Stability Oversight Council, a ... task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.
Mike Konczal of the Roosevelt Institute ... has pointed out what's wrong with this: just consider who would have been on that council in 2005,... probably the peak year for irresponsible lending.
Well, in 2005 the chairman of the Fed was Alan Greenspan, who dismissed warnings about the housing bubble... Meanwhile, the secretary of the Treasury was John Snow... Karl Rove treated him like an errand boy.
The comptroller of the currency was John Dugan, who still holds the office. He was recently the subject of a profile in The Times, which noted ... he ... almost never acts to protect consumers.
Oh, and on ... consumer protection: the Dodd bill creates a more or less independent agency to protect consumers... That's a good thing. But it gives the oversight council the ability to override the agency's recommendations.
The point is that the Dodd bill would give an administration determined to rein in runaway finance the tools it needs... But it wouldn't do much to stiffen the spine of a less determined administration. On the contrary, it would make it easy for future regulators to look the other way as another bubble inflated.
So what the legislation needs are explicit rules, rules that would force action even by regulators who don't especially want to do their jobs. There should, for example, be a preset maximum level of allowable leverage — the ... House sets this at 15 to 1, and the Senate should follow suit. There should be hard rules determining when regulators have to seize a troubled financial firm. There should be no-exception rules requiring that complex financial derivatives be traded transparently. And so on.
I know that getting such things into the bill would be hard politically: as financial reform legislation moves to the floor of the Senate, there will be pressure to make it weaker ... in the hope of attracting Republican votes. But I would urge Senate leaders and the Obama administration not to settle for a weak bill, just so that they can claim to have passed financial reform. We need reform with a fighting chance of actually working.

links for 2010-04-04

Posted: 04 Apr 2010 11:03 PM PDT

Easter Egg Hunt

Posted: 04 Apr 2010 08:46 PM PDT

I talked to my parent's tonight, and they followed the family tradition of having an Easter picnic in the Sutter Buttes. It's aunt's, uncles, cousins, grandparents, etc., and there has always been an Easter egg hunt for the kids. But now that the kids are all older, they decided to change the hunt a little bit. Each kid got one dozen eggs and a shotgun. The decorated eggs were launched -- as in a trap shoot -- and the kid who shot the most eggs out of the air was the winner of the "hunt."

Yep, that's my family.

Trying Out the "Reblog" Button...

Posted: 04 Apr 2010 12:42 PM PDT

Reblogging Brad DeLong's I Need to Review Dean Baker's "False Profits":

I really need to get started on this... The first two paragraphs:

Dean Baker is one of the very few economists to have gotten things right in the mid-2000: to have not only recognized the housing bubble, but to have predicted that it would produce big trouble for the economy as a whole. Now he has produced his book on the financial crisis, *False Profits.* Given the sales of all the books by all the people who did not predict that the housing bubble would have big bad consequences for the economy as a whole, everybody who has bought even one of those other books is under a strong moral obligation to buy Dean Baker's book and to read it was very close attention. And they will all profit substantially from doing so.

But let me start by saying how I disagree with the book. I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other.

via delong.typepad.com

"EPA May use Clean Water Act to Regulate Carbon Dioxide"

Posted: 04 Apr 2010 12:24 PM PDT

The administration may not need new legislation to begin regulating emissions of carbon dioxide:

EPA may try to use Clean Water Act to regulate carbon dioxide, by Les Blumenthal, McClatchy Newspapers: The Environmental Protection Agency is exploring whether to use the Clean Water Act to control greenhouse gas emissions, which are turning the oceans acidic at a rate that's alarmed some scientists.
With climate change legislation stalled in Congress, the Clean Water Act would serve as a second front, as the Obama administration has sought to use the Clean Air Act to rein in emissions of carbon dioxide and other greenhouse gases administratively.
Since the dawn of the industrial age, acid levels in the oceans have increased 30 percent. Currently, the oceans are absorbing 22 million tons of carbon dioxide a day.
Epa-water
Among other things, scientists worry that the increase in acidity could interrupt the delicate marine food chain, which ranges from microscopic plankton to whales. ... The situation is especially acute along the West Coast. ...
Scientists suspect that acidic water connected with upwelling killed several billion oyster, clam and mussel larvae ... at the Whiskey Creek Shellfish Hatchery near Tillamook on the Oregon coast in the summer of 2008. ... Shellfish growers in Washington state ... increasingly are concerned that corrosive ocean water entering coastal bays could threaten their ... industry. ...
The Clean Water Act considers high acidity a pollutant... In late March, the EPA published a Federal Register notice seeking public comment on whether the Clean Water Act could be used.
"It's not 100 percent clear where we go here," Suzanne Schwartz, the deputy director of the EPA's Office of Wetlands, Oceans and Watersheds... "This is not an easy issue. We are trying to figure out how to proceed." Schwartz said the agency was looking to see whether there were more efficient ways to deal with ocean acidification than using the Clean Water Act. ...

As with the financial crisis, where the failure to enforce existing regulation was a factor in the meltdown (not to mention the deregulation that also occurred), someday we may wonder why we didn't enforce the environmental regulations that were already on the books.

"Greenspan, Summers, and Why the Economy Is So Out of Whack"

Posted: 04 Apr 2010 08:53 AM PDT

Robert Reich from the "green room":

Greenspan, Summers, and Why the Economy Is So Out of Whack, by Robert Reich: I'm in the "green room" at ABC News, waiting to join a roundtable panel discussion on ABC's weekly Sunday news program, This Week.
Alan Greenspan is now being interviewed. He says he bore no responsibility for the housing bubble ... because no one could have known about the bubble ... in the years before it burst. Larry Summers was interviewed just before Greenspan. He said the economy is expanding, that the Administration is doing everything it can to bring jobs back, and that the regulatory reform bills moving on the Hill will prevent another financial crisis.
What?
If any single person is most responsible for the financial crisis, it's Alan Greenspan. He presided over a Fed that lowered interest rates to zero (adjusted for inflation) but failed to prevent banks from using essentially free money to speculate wildly. ...
If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin. In 1999 they advised Congress to repeal the Glass-Steagall Act, which since 1933 had separated commercial from investment banking. ...
At the same time, Greenspan, Summers, and Rubin also quashed the efforts of the Commodity Futures Trading Corporation to regulate derivatives, when its director began to worry that derivative trading already was getting out of control.
Yet Greenspan continues to take no responsibility for what occurred. ... I dislike singling out individuals for blame or praise in a political system as complex as that of the United States but I worry the nation is not on the right economic road, and that these individuals — one of whom advises the President directly and the others who continue to exert substantial influence among policy makers — still don't get it. 
The direction financial reform is taking is not encouraging. Both the bill that emerged from the House and the one emerging from the Senate are filled with loopholes that continue to allow reckless trading of derivatives. Neither bill adequately prevents banks from becoming insolvent because of their reckless trades. Neither limits the size of banks or busts up the big ones. Neither resurrects the Glass-Steagall Act. Neither adequately regulates hedge funds. 
More fundamentally, neither bill begins to rectify the basic distortion in the national economy whose rewards and incentives are grotesquely tipped toward Wall Street and financial entrepreneurialism, and away from Main Street and real entrepreneurialism. ...
Meanwhile, the so-called jobs bills emerging from Congress and the White House are puny relative to the challenge of restoring jobs in America. Last Friday's jobs report, read most positively, showed 112,000 jobs added to the economy in March. But that's below the number needed simply to keep up with an expanding population. ...
The American economy is seriously out of whack. The two people interviewed this morning don't seem to understand how far. 

I don't agree with all of this, e.g. the emphasis on the repeal of the Glass-Steagall act as a cause of the crisis, but I do agree that both financial reform and the jobs bill fall far short of what we need.

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