From AmericaBlog:
Earlier this week, Democratic Senator Elizabeth Warren (D-MA) went on CNBC last Friday to debate the Glass-Steagall banking regulations that were adopted in 1933, and her proposal to update and strengthen the law in a way that would likely force the big banks to spin off some of their business and stop being so damn big.
As you can imagine, CNBC is no fan of Glass Steagall, regulating banks, or Elizabeth Warren.
During her appearance on CNBC, Warren basically kicked ass, the video went viral, with over 700,000 views in a matter of days, so CNBC […] filed a complaint with YouTube and had the video yanked from the Senator’s official YouTube account.
Here’s another copy of the video (at least until it gets taken down):
Transcript of the best bit:
CNBC’s BRIAN SULLIVAN: In the early 80s, the seventh-largest bank in America, it failed, almost set off another large banking crisis. Shouldn’t we just tell the American consumer that no matter what we do, there will be bank boom and bust cycles, no matter what the laws and regulations. You can’t protect everything.
ELIZABETH WARREN: No. That is just wrong.
CNBC’s BRIAN SULLIVAN: Why?
ELIZABETH WARREN: Just look at the history. [Sullivan interrupts at this point, but Warren talks over him.] From 1797 to 1933, the American banking system crashed about every 15 years. In 1933, we put good reforms in place, for which Glass-Steagall was the centerpiece, and from 1933 to the early 1980s, that’s a 50 year period, we didn’t have any of that – none. We kept the system steady and secure.
And it was only as we started deregulating, you start hitting the S&L crisis, and what did we do? We deregulated some more. And then you hit long-term capital management at the end of the 90s, and what did we do as a country, this country continued to deregulate more. And then we hit the big crash in 2008.
You are not going to defend the proposition that regulation can never work, it did work.
CNBC’s BRIAN SULLIVAN: I didn’t say regulation never worked, Senator. By far and away, and I agree, there were fewer bank failures in that time after Glass-Steagall.
ELIZABETH WARREN: “Fewer,” as in of the big ones, zero.
Three thoughts:
1) I don’t think that putting back Glass-Steagall would, in and of itself, do much to stabilize the banking system. Nor is there any chance that the new Glass-Steagall could pass Congress. So what is Warren doing? Kevin Roose suggests “Senator Warren isn’t trying to change individual laws, so much as move the entire political discussion of the financial sector to a different rhetorical arena and force other legislators to join her there. […] Senator Warren is proposing reforms she knows have no chance of passage, simply to widen the boundaries of debate.”
2) The Streisand Effect may apply here.
3) Yet another example of how copyright laws are being used, not to protect creators from unfair competition that would make it impossible to make a profit, but in an attempt to censor political speech.
That’s actually one of the first arguments against copyright I’ve seen that I’m actually sympathetic to.
It’s odd to claim “censorship” given that it is posted on CNBC here
http://video.cnbc.com/gallery/?play=1&video=3000182337
Putting it up on your own site isn’t censorship. CNBC probably wants to have you view it on their site (with their ads, their control, their other hopefully-tempting links) so that they can, you know, make money. Which–whether or not you like CNBC–is a pretty reasonable desire for a TV show that they just spent a lot of money producing.
Were they motivated by embarrassment? Sure, perhaps. Or perhaps they don’t like Warren. But if you’re going to talk motivation, there’s a bit more about money: Well, Upworthy started it, right? But as per Upworthy the EMBEDDED video didn’t work well.
Of course, this is a problem with a basic solution: link to CNBC instead of embedding. There’s no real need to put someone else’s content on your site. But that would take people off of Upworthy and on to CNBC, which Upworthy probably doesn’t want. So they Youtubed it, instead.
Upworthy tries to imply that it’s about censorship by linking to other things which CNBC doesn’t care about. Yes: and that’s because those other links have views in the 100s or low thousands, not pushing a million.
I hadn’t known it was!
#beginunneccessarilyvicioussnark
If only there were some type of worldwide distributed system of names, such that you could go to the “site” of some large media corporation and do a “search” on “keywords”. Alas, Microsoft’s browser bundling in the 1990s crushed all innovation, and there is no such fanciful info-tube-way.
http://search.cnbc.com/main.do?partnerId=2000&keywords=glass-steagall%20%22elizabeth%20warren%22&sort=date&minimumrelevance=0.2&pubtime=30&pubfreq=d&categories=exclude&page=2
#endunneccessarilyvicioussnark
Ha! What a fun typo — if “typo” is the word.
No, we didn’t hit long-term capital management at the end of the ’90s. Precisely the opposite: we failed to achieve long-term capital management, because we no longer had laws in place to keep people from focusing on making a quick buck in the short term.
Warren expresses this idea by noting that we hit another financial crises when the ironically-named (fraudulently-named?) hedge fund Long-Term Capital Management, LLC collapsed in a fit of hubris, requiring the Fed to supervise a multi-billion dollar bailout.
In short, what does the original post have in common with these various financial institutions? They’re both under-Capitalized!
What laws do you think should have been in place, which would “keep people from focusing on making a quick buck in the short term”?
The Congresswoman seems to think that appropriate laws would also have prevented the “big crash of 2008”. Do you happen to know what laws those would be?
For me, I’m glad we didn’t do something crazy like leaving the big financial firms that fucked up to go bankrupt and exit the market. That could have led to a nightmare scenario of an endless slow-GDP-growth, slow-job-growth “recovery” lasting years and only benefiting holders of equities. Now that companies know that sufficiently large fuckups will be risk-socialized but the rewards left private, they’re all behaving with vastly increased prudence and fiscal sobriety.
Apparently Bob’s #endunneccessarilyvicioussnark command didn’t take.
You make a strong argument that intervention to prop up the banks created a terrible moral hazard — clearly a bad result. And seeking risk-loving bankers get their comeuppance would have been so sweet!
But what you haven’t argued is that NOT intervening would have produce better results. And ultimately, the test of economic policy is not that it produces a gratifying morality play or satisfies our lust for vengeance, but that it produces the best economy we can achieve under the circumstances.
Thus the the argument supporting intervention, supported by Ben Bernanke’s long study of the Great Depression, is that permitting banks to simply fail would have triggered a cascade of similar failures, and instead of a long, slow recovery, we would have had Great Depression II.
We found ourselves between a rock and a hard place: Permit the banks to fail, which punishes the bankers who made bad decisions and incidentally decimates everyone’s economy for a decade. Or prop up the banks, reward the SOBs who got us here, but spare most people most of the pain. In effect, bankers know politicians will face this choice, and thus hold the vast majority of the economy hostage to risks of their reckless behavior. Knowing that government will be loathe to permit the vast public to suffer, these banks come to be called Too Big To Fail.
The remedy for this conundrum is not to permit these banks to fail during a crisis. The remedy is, BEFORE the inevitable crisis, to make these banks pay for the risk they impose on society by requiring them to install additional safeguards (heightened capital requirements, emergency dissolution plans, etc.) and perhaps through additional taxation (akin to compelling people in flood plains to buy flood insurance). Given the relative efficiency of financial markets, this might well have the effect of causing these banks to spin off operations until each piece is sufficiently small to avoid triggering these safeguards and taxes.
Alternatively, we could seek for ways to simply outlaw financial institutions that exceed a certain size.
Were the interventionists wrong? Would we have been better off just letting the banks fail? Perhaps. There are certainly reasons to suspect that the decision-makers had a bias in favor of propping them up. (But they also had a bias in favor of propping up Lehman Bros., yet they let that one go down hard.) In short, I’m not really sufficiently expert to judge. And the scary part is, perhaps no one is.
Nobody is fortunate that I don’t ban for puns! Groooann.
Truly, nobody benefit from this policy.
And it’s nice to be appreciated; thank you.
Let’s compromise. No ban, just a savage beating.
Nobody, if there would have been a cascade of similar failures, then there should have been. Financial institutions which cannot survive on their own merit (given a regulatory environment that permits them to behave non-stupidly, which they possess) *need to go away*. “But we’ll have a Depression!” isn’t an argument, it’s an admission that the people managing the financial sector have fucked it up comprehensively. Very well; fire them.
The Bernanke position is akin to saying, this privately-owned built-in-1813 toll bridge is structurally unsound. It could fall down at any time. In fact, if Girder 27 breaks, then Girders 28 through 59 will all fail as well, and the whole thing will go into the drink. Therefore, let’s buttress the SHIT out of Girder 27, so that the bridge can continue in operation.
Or, crazy notion, we could shut the bridge right now, let it fall into the bay on its own time, and allow the forces which permitted the construction of a toll bridge in the first place (to wit: paying customers on both sides of the water) to operate without the government second-guessing and propping up the competition, and build a new bridge, using 2013’s technology and engineering instead of 1813’s.
I don’t need to show that letting the (closed, traffic-less) bridge fall into the water now would be a better outcome than waiting for it to do so during the Memorial Day traffic surge; it’s flippin’ obvious. If in 21st century America your bank or financial institution, with all the privilege and perks and freedom granted to our titans of capital, cannot stay in the black over the long term, then that is overwhelming prima facie evidence that you (in your role as bank management) are a criminal or a moron. Your institution must either replace you and repudiate your thieving/endumbening policies, or die.
What laws should have been in place? A ban on Collateralized Debt Obligations and Credit Default Swaps, which were first invented in 1994.
A reasonable regulatory regime in the Clinton era would have looked at those things and said those needed to be tightly regulated or banned for large financial institutions to play with. Instead they were left completely unregulated, and became a huge driver in the housing price bubble in the 00’s and an even larger driver in the crash of 2008. There were $70 trillion in CDOs in 2009, with no standards and no public market. There are still nearly $30 trillion in CDOs, although the market in them is somewhat better regulated now than it was.
After the crash started, every major bank that was of questionable solvency in 2008 should have been nationalized, with its existing questionable assets placed into a holding company and its valuable assets passed on to a newly created and capitalized bank. The same thing that was done in the S&L crisis and in the Swedish financial crisis.
Simply letting everything fail and waiting around for a new financial system to develop would have given us an even worse Depression than the one we have, but the solution that was used was clearly a lousy solution.
When you have a bridge that is near failing, the correct thing to do is to tear it down and build a new one, not wait around for it to fail. If you discover that a bridge is about to fail due to girder 27 is to shore up girder 27 and divert traffic until the bridge can be replaced. It is harder to replace a collapsed bridge than it is to demolish a bridge and rebuild it (or to repair it- if the only thing wrong is that girder 27 has a structural defect, then you brace or replace girder 27 and check all the other girders- letting a bridge suffer a collapse because it has a known repairable defect is absurd). And toll bridges are a lousy way to handle most bridges, which is why they have been replaced with free publicly owned bridges in most places.
You’re ludicrously off on the magnitude of the CDO market. A bit more than $1 trillion in CDOs have been issued ever; $1.5 trillion at the very most. $70 trillion is the size of the global fixed-income investment pool; CDOs gave access to the US housing market (housing is normally too volatile for fixed-income investors) for that investment pool, by providing a convenient fixed-return vehicle that moved the risk to one end of the pool.
I would agree that CDOs were badly regulated, which is unsurprising given that they were brand new. You have to wreck the racecar a couple of times before you can figure out the top safe speed for the track. But they were not of sufficient magnitude to be even a major blip on the world financial markets.
Credit default swaps hit a peak of a little over $60 trillion in 2007; they’re at about $25 trillion now. I suspect you’re conflating the two numbers.
I understand the appeal of the nationalize-it-and-save-the-assets strategy, but that still ends up introducing a huge moral hazard.
Yes, sorry, I’d flipped CDOs and CDSs in my numbers.
Financial instruments that demonstrably produce no significant economic benefit generally and potentially crash the economy into a great depression are things which should not get crash tested using the global economy.
The moral hazard exists under almost any solution except one in which the financial industry collapses for a generation, as the real problem point for the moral hazard is the upper level employees of the finance companies, who made out like bandits in the boom and then did okay in the crash. Any solution that doesn’t end up with them unemployed and unemployable for years doesn’t make up for the kind of cash they were able to rake in on the bubble. Actually, even permanent unemployment doesn’t balance out making millions of dollars during your run (just as the high likelihood of injuries don’t convince professional football players to do something other than football), so there really isn’t anything short of regulations that would seriously entangle the bonuses and wages of top financial sector employees and tie them to the overall performance of the economy (or mobs with guillotines) that would convince a Goldman Sachs employee to not participate in designing junk CDSs. Even then, there is potentially a tragedy of the commons problem.
The notion of a self-regulating market has always been foolish, and its appeal never increases when it’s made during yet another recovery from yet another market failure.
Government regulation is necessary to a healthy market that serves the public good. Denial of this elementary fact has been crippling our society since the Reagan days.
The self-regulating market works pretty well if you value some people making out like bandits and everyone else suffering through long periods of misery and poverty.
Once again, excellent analysis – if you regard economic policy as a morality play and an occasion to vent a lust for vengeance.
Government intervention to close a weak bridge before it collapses IS the analogy of closing down hazardous financial institutions before they collapse. The question remains, however, how to identify hazardous institutions, and how to shut them down.
That said — what factors should go into the analysis regarding a bridge? What if you had a bridge that handled 90% of the traffic, and the Left Bank has all the hospitals and the Right Bank has all the transportation hubs permitting the delivery of heating fuels and food. Is “Shut the damn thing down” really the obvious choice? Suddenly the “buttress the SHIT out of it” strategy might not look so bad, at least during an emergency.
Does government intervention interfere with market forces that might build a substitute bridge? Yes – and that interference imposes costs. What the libertarian fails to give any weight to, however, is that the loss of the bridge also imposes costs – and those costs may utterly swamp the cost of distorting the market for bridges.
This is why libertarian philosophy works so well as morality play, and so badly as public policy. Libertarians are happy to overlook the real, practical harm that people would experience by the closure of a bridge, because in a state of nature nobody should expect to have bridges, and thus the loss of bridges imposes no cost relative to being in a state of nature. In contrast, in a state of nature we SHOULD expect to be undisturbed by an intrusive government. Thus, government action is the only source of COST measurable by libertarians.
If you are unencumbered by this world view, you a free to simply compare the practical consequences of intervening to support a bridge vs. not intervening. The fact that government might be intervening to provide people with benefits to which they have no rightful claim (from the perspective of the state of nature) will have no bearing on your analysis. And the fact the government might intrude upon people’s autonomy to tax them for the purpose of providing them with these superfluous benefits will have little bearing – other than a standard cost/benefit analysis, perhaps stratified by social groups/classes. (“Is it fair to impose a bridge tax on people who foreswear ever using the new bridge, given that they will derive benefits – goods, services, economic growth – as a result of the new bridge?”)
And thus it is with the regulation of financial institutions. I’d like regulations that produce optimal outcomes, whether or not they provide a good morality play.
But note the flip side of this goal: Perhaps the deregulators are right. That is, we need to compare the cost of increased regulation to the burdens of the boom and bust cycle. Our current financial crisis resulted in no small part because the world has grown SO DAMN RICH, people were willing to invest in undocumented mortgages because they had nothing else to do with all their damn money. And why is the world so damn rich? In part because of economic liberalization that has swept the globe since the Reagan era. This liberalization has hugely increased the living standards for the middle class in China, India, Brazil, etc. If you’re goal is to benefit “the least of these my brothers,” you could scarcely find a better policy than globalization.
Yes, globalization also creates losers. Yes, deregulation also exacerbates boom and bust cycles. We should seek to measure these consequences, and look for remedies. Maybe the remedies involve clamping down on globalization and re-regulating the deregulated. But sometimes, the optimal remedy for corrupt practices is simply be to tax the winners handsomely to provide social safety nets for the losers.
Nope, that policy does not create a very satisfying morality play. I don’t expect Ayn Rand to weave that into a story line any time soon. But it might make for optimal economic policy.
Charles:
“Financial instruments that demonstrably produce no significant economic benefit generally and potentially crash the economy into a great depression are things which should not get crash tested using the global economy.”
Yes, but Congress is written right into the Constitution, so we’re not going to be able to get rid of them.
Handled (i.e., regulated) properly, CDOs provide liquidity and increase the stability of financial institutions. Credit swaps provide a huge economic benefit: they let investors specifically identify the risk level they can tolerate and see in black and white the variability that choice puts in their earned interest rate.
It is true that these instruments ended up doing tremendous damage, because of the short-sighted behavior of the financial professionals and the failures of the regulators at many levels, from Congress on down. But there really aren’t any financial instruments that are of any use, which don’t have the same potential for Gotterdammerung. The devil is in the details and in the structures; I’m sure you can recognize where conservative blind spots contribute to failures, and I’m hopeful that you will recognize where a liberal blind one is doing so: the focus on intention. It doesn’t matter what the trading desk clerk meant to do, or what his character is like (for the most part), or what Congress wanted to have happen when it passed the Fuck Up The Economy Act of 1392 – it matters what the perceived and real incentives are.
Less ideologically and more structurally, I read a good piece the other day (can’t find it now) suggesting that the biggest glitch in default swaps was that they were done directly party-to-party. Instead, there ought to have been an exchange/market where all such transactions were bought and sold transparently and competitively. That’s not so much a restraint on the freedom to act badly of market actors, as it is a requirement that they do certain things which most of us agree are good ideas.
The self-regulating market works pretty well if you value some people making out like bandits and everyone else suffering through long periods of misery and poverty.
All markets (and all non-market distribution mechanisms) have the potential to make a few people rich and to leave others in misery; all regulatory schemes are able to leave gaping holes and exploits. The Soviet Union was famously hostile to self-regulating markets; it had command and control hierarchies coming out its asshole, and – shockingly – there were some people making out like bandits, and the rest of the country lining up for bread. Self-regulating markets work beautifully if the actors have sufficiently strong incentives to behave, and if behaving is pragmatically a good idea, and if there is a civil society with the ability to scope out violations and enforce norms. They work horribly in the absence of those factors. Other mechanisms have their own special-flower needs; Communism as a large-scale system happens to work magnificently, when it’s being invaded by the Nazis.
Nobody:
Once again, excellent analysis – if you regard economic policy as a morality play and an occasion to vent a lust for vengeance.
Neither of those things needs to be true for my analysis to be right. If you are dropping watermelons and babies off a cliff, and demanding that the cliff-dwelling peoples hurl gliders underneath the falling objects and people to save them, morality might tell me that we should save the babies before we save the watermelons. But it is physics, not metaphysics, that tells us that babies and watermelons will both splat at the base of the cliff if they aren’t englidered, and I need harbor no hostility towards babies or glee at the justified death of watermelons in order to calculate the number of each that will die under a particular policy.
The question remains, however, how to identify hazardous institutions, and how to shut them down.
They are the ones approaching the government saying “if you don’t give us money we will fail”, and if we say “no”, then presumably they will. Doesn’t seem all that hard.
What the libertarian fails to give any weight to, however, is that the loss of the bridge also imposes costs – and those costs may utterly swamp the cost of distorting the market for bridges.
Of course libertarians acknowledge the loss of the bridge imposes cost, direct and indirect. Indeed, they/we generally go out of the way to account for as many costs as we can identify. As for swamping the cost … come on. The Corps of Engineers could put up a bridge overnight while being shelled by Nazis…70 years ago. It takes a gazillion years to build a bridge because liberals want union construction workers to have a year’s worth of work. (Weird, how you don’t worry about the there’s-no-bridge cost THEN.)
The idea that West America, with all the honkytonks, and East America, with all the distilleries, will shrivel up and die for lack of the bridge is just dumb. Of course they need the bridge – that’s why they’ll build another one. They’ll do it as fast as physics will allow (very fast) and as fast as the regulators will permit (two bolts fastened per day, once the HR-391B Bolt Fastening Form is approved by the site steward). The real costs of that delayed process – in our financial system scenario, the undoubted decades of lost prospective bankiness as we search in desperate hope for people willing to make billions of dollars while doing no work whatsoever – are what is swamped by the costs of having a jackanape system of making sure the worst fiscal criminals walk.
Which brings me back to Charles:
as the real problem point for the moral hazard is the upper level employees of the finance companies, who made out like bandits in the boom and then did okay in the crash. Any solution that doesn’t end up with them unemployed and unemployable for years doesn’t make up for the kind of cash they were able to rake in on the bubble.
You’re right, it doesn’t. That’s why they should have been executed, and their firms razed to the ground, pour l’encouragement des autres.
I am often sarcastic, and the incandescent genius of my wit may sometimes blur the solid meanings behind what I say, so let me clarify that:
Financial executives who in genuine fact stole or intentionally mismanaged the trust funds for children’s educations, the retirement funds for career laborers, the annuities set up to ensure widows and widowers would enjoy a modest comfort in their golden years, should have been intentionally and systematically executed by the state, in as hard-assed and unforgiving a way as possible while still being consistent with the civil rights of criminal defendants.
I don’t expect such a policy to make it into law, but I am utterly sincere in believing it a wise policy, and I hope someone will remember it the next time we do a Kabuki dance about who believes what. It’s the libertarian who wants pirates and vandals and embezzlers to swing from the gibbet in the town square, and you don’t.
How damn rich? See http://www.businessweek.com/articles/2013-07-29/the-whole-world-is-getting-richer-and-thats-good-news#p1
During the Industrial Revolution (1820-1870-ish), the UK saw average GDP grow 87% in only 50 years. Wow, that was some major growth!
Except by the standards of the LAST 50 years. Since 1960, only 80 million people ( $6000 – that is, exceeding the average income of Italy, Ireland, or Spain in 1960.
And 1.7 billion people live in countries with an average per capital income > $10,000.
Admittedly, average income differs from median income. But still, the trends are really jaw-dropping by any standard.
Let’s try that again:
Since 1960, only 80 million people (less than 1% of world population) live in countries that grew less than 100%.
5.1 billion live in countries that grew 100+%.
4.9 billion live in countries that grew 500+%.
Japan and Egypt grew at least 8x (that is, 700%). India grew 10x. Indonesia grew 13x. China 17x. Thailand 22x.
Today 3.5 billion people live in countries with average per capital income > $6000 – that is, exceeding the average income of Italy, Ireland, or Spain in 1960.
And 1.7 billion people live in countries with an average per capital income > $10,000.
Admittedly, average income differs from median income. But still, the trends are really jaw-dropping by any standard.