Tag Archives: Dodd-Frank

03.16.2013 | Too Big To Fail: The Volcker Rule or Glass Steagall?

It will be tough to remedy “too big to fail” with the Volcker Rule. At the other extreme, some suggest a 2013 version of Glass-Steagall. Here is the short version of the facts:

Proposed by former Fed Chair Paul Volcker, his rule was expressed in 10 pages of the Dodd Frank Wall Street Reform and Consumer Protection Act. Essentially the Volcker Rule said that banks could no longer engage in proprietary trading for their own account because it created too much risk.

But, what does proprietary trading mean? We can start with the trading that former and current Chase executives described to the Senate Investigations Subcommittee during testimony yesterday. Here is just one graph that displays the magnitude of their proprietary trading of indescribably complex financial products. Do remember that you need to add 6 zeroes to the numbers along the y-axis.

With much more detail, the FDIC/SEC/Treasury/Federal Reserve also tried to explain proprietary trading. They needed 298 pages, 1300 questions and 400 topics.

Responding, former banker Henry Kaufman took a different path.

“Paul Volcker and I are the same age [84]. Paul wanted to take an aspect of risk-taking out of the financial conglomerates. That’s a worthy endeavor. But the history of regulation shows that the private sector pushes back and waters it down. Dodd-Frank didn’t want to address the longer-term consequences of ‘too big to fail.’ The 10 largest banks held 10 percent of the assets in 1990; today they control over 70 percent. This trend accelerated in 2008. The ‘too big to fail’ got even bigger.”

He continued, “My view is that we should break up the big financial conglomerates and separate investment banking. Otherwise we’re going to have ongoing government intervention in the credit allocation process. That threatens economic democracy, and the U.S. is the last bastion of economic democracy.”

Sounds like Glass Steagall.

A 34 page 1933 law, Glass-Steagall separated investment and commercial banking, changed the structure of the Federal Reserve and created the FDIC. J.P. Morgan knew, for example, that it had to divide itself into a commercial bank and an investment bank. 2 entirely separately owned firms, Morgan Guaranty, a commercial bank and Morgan Stanley, an investment bank were the result.

And now, we are back to where we started.

Sources and Resources: For primary sources, here is a lengthy description of the Volcker Rule while here is the 34 page Glass Steagall Act. For interpretation, this 2011 NY Times column discusses the Volcker Rule’s implications and the Henry Kaufman response. Finally, to see more about yesterday’s testimony, here is the Committee document and here is a WSJ article (the source of the above graph).

Posted by: adminEcon
Tags: "too big to fail", Dodd-Frank, Glass-Steagall, Volcker Rule
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10.01.2012 | Election Economics: What To Know For The First Presidential Debate

Presidential debate moderator Jim Lehrer said there would be six 15-minute segments in the first presidential debate on October 3rd. Devoting the entire first half to “the economy,” he will also cover healthcare, the role of government, and “governing.”

Like the candidates, let’s do some prepping.

The Economy:

In an excellent NY Times column, James Stewart asks, “Are Americans Better Off?” His answer initially takes us to the basic economic yardsticks that EconLife Election Economics looked at last week: GDP, unemployment, household income and inflation. Tepid, all are slowly improving but close to where they were when Mr. Obama entered office (except the inflation rate which has been low).

How affluent we feel--the wealth effect–is a different story. As Mr. Stewart points out, it all depends on who you are. Those who have more feel richer and more secure because stock markets are up, household debt is down, and home prices have started to rise. However, bombarded by foreclosures, student loans, auto loans and unemployment, the less affluent are not feeling better. Add to that anyone living on interest from treasuries and other securities with a “0″ return and you get many people who are not feeling better off.

Where are we? I hope that each candidate will explain whether we are better off.

Healthcare:

Statistics about US healthcare are tough to pin down when you challenge, defend and predict the impact of the Affordable Care Act of 2010. For example, you could judge healthcare on the basis of mortality rates. However, people disagree about mortality rates because the numbers you select depend on whether you look at the causes of death. With many statistics, equally defendable alternatives are probably feasible.

We can be sure, though, that as the average age of our population ascends, Medicare, Medicaid and Social Security will be increasingly stretched. I mention Social Security here because demand for its disability benefit has been soaring.

Where are we? I hope that each candidate will convey the daunting challenges we face because of increasingly inadequate revenue for government programs that relate to health care.

For more detail, you can look at 2 Election Economics posts, Assessing the Quality of Current US Healthcare and Our Aging Population.

Role of Government and Governing:

Here we have the great divide. Whether looking at taxes, healthcare or financial regulation, there is an ideological split. The Keynesian side says government, through taxation and regulation can perpetuate economic health and fairness. By contrast, the Adam Smith/Hayek/Friedman perspective says economic prosperity and US freedom depend on the incentive to benefit from hard work, education and entrepreneurship.

Where are we? I hope that each candidate explains and presents the implications of his economic philosophy.

EconLife presented more detail about Keynesian economics here, and the Hayekian view, here.

A final thought: Most articles about the presidential debates focus on “turning the tide,” Janet Brown, the person who organizes the debates, practicing, what to call the president, what each candidate needs to achieve. You see that sadly, few articles are preparing us for content.

Sources and Resources: My thanks to James Stewart for his ideas about being better off and to the LA Times, as the only news source I could locate with an outline of debate topics.

Election Economics Topics:

Posted by: adminEcon
Tags: Affordable Care Act of 2010, Are we better off?, Barack Obama, Dodd-Frank, financial regulation, Friedrich von Hayek, irst presidential debate, Jim Lehrer, John Maynard Keynes, Medicaid, Medicare, Milton Friedman, Mitt Romney, social security
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08.23.2012 | Salary Secrecy

What happens when everyone knows how much you earn?

A Boulder, Colorado firm, has voluntarily decided to let workers check a spreadsheet and see what others take home. One employee said she likes it, even when she discovers someone earns more. “I am also grateful to know there’s no back-door deals…” By contrast, paycheck transparency can be tough to handle when someone feels an associate should not earn more. As another employee said, “I have a colleague who’s making a little less than me who comes to me and says ‘I don’t think you deserve to make more than I am making…’”

Through required CEO employee ratio disclosure, the Dodd-Frank Wall Street Reform and Consumer Protection Act takes a step beyond voluntarily sharing salary information to mandatory disclosure. With Dodd-Frank, the SEC is charged with writing rules to insure a pay comparison between CEO compensation and median employee salary. The goal? Transparency could create social pressure to narrow huge gaps between CEO and employee pay.

Thinking of the impact of knowing your “neighbor’s” salary, we can ponder economist Richard Easterlin’s happiness research. Easterlin says that as wealth accumulates, it bestows increasingly less extra satisfaction. Believing that pleasure from wealth is relative, he concludes that as long as you have more than your neighbor, you feel good. Consequently, rich or poor, people just need to have more than someone else to feel good. Here, 2 economists challenge Dr. Easterlin’s conclusions.

Sources: Thanks to Marketplace.org’s “Payday” series. Discussing pay disclosure, their programs here and here were fascinating. To check the current status of the executive employee salary ratio rule, this SEC website has the information. You might also want to look at California’s mandatory pay disclosure rule for public employees. California state workers protested when the Sacramento Bee published salary information from public records.

Posted by: adminEcon
Tags: CEO pay, Dodd-Frank, Easterlin Paradox, labor markets, mandatory pay disclosure, privacy, Richard Easterlin, salaries, transparency, wages
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07.29.2012 | Solving Our Economic Problems

Having experienced an economic calamity, don’t we just need to figure out how to prevent it from happening again?

Yes…but that might be impossible.

MIT economist Andrew Lo read 21 books on the financial crisis. 11 were from academics, 10 from journalists and one was written by former Treasury Secretary Henry Paulson. Comparing the dates, the problems, the solutions that deal with the events of 2006-2009, here is what Dr. Lo learned:

There is disagreement about when the crisis began:

Mid-2006 when the housing bubble crested?
Late-2007 with the liquidity crunch in the shadow banking system?
September 2008 with the Lehman Brothers bankruptcy and “breaking the buck” by the Reserve Primary Fund?

People disagree about the protagonists and the focus of the financial crisis:

a housing bubble?
concentration of power with financial elites?
financial innovation and deregulation?
subprime mortgage crisis?
regulatory shortcoming?
misaligned financial incentives?
disproportionate emphasis on shareholder wealth?
too big to fail?
income inequality which led to political decisions about housing and easy credit?
failure of the market system?
“animal spirits?”
international contagion of investment products?

Depending on how the problems were defined, the solutions differ:

bailouts
diminish inequality
government subsidies for those who cannot afford financial advisors
government monitoring of financial products, creating safer financial products
greater transparency
price risk higher
capital requirements
separate investment and commercial banking

At the end of his 36 page analysis, Dr. Lo suggests that we need a “black box” of indisputable facts rather similar to the data from a plane crash. However, Dr. Lo warns us that the complexity of the crisis and of human behavior may preclude us from ever getting satisfactory analysis.

Dr. Lo’s paper returns me to Dodd-Frank. Isn’t it a solution to a problem we have not clearly identified?

A draft of Dr. Lo’s paper can be read here while the work of the Financial Crisis Inquiry Commission is here and here in econlife and here is their report.

Posted by: adminEcon
Tags: " Henry Paulson, Ben Bernanke, Dodd-Frank, financial crisis, fiscal policy, great recession, monetary policy
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07.23.2012 | Election Economics: Assessing Dodd-Frank

University of Chicago professor Luigi Zingales tells the story of being asked to tape his windows during a tornado watch in Boston. A similar mandate in Italy, he said, would mean that the brother of the mayor was in the tape business. Furthermore, when instructed to stay inside, he recalled the Italian attitude toward government meant you would fare well if you did the opposite.

Dr. Zingale alluded to his experience in Boston when discussing the appropriate economic role for government. At its core, government needs to be trusted. One source of trust is simplicity and transparency.

For a prototype, he suggested we look at the 37 pages of the 1933 landmark banking law, Glass-Steagall. To eliminate banking abuses, Glass-Steagall simply said investment banks and commercial banks had to be separate businesses. Banking monoliths like J.P. Morgan & Co. had to divide themselves into institutions that provided traditional banking services and those that focused on securities work for businesses.

By contrast, covering everything from derivatives to systemic risk to consumer protection, the scope of Dodd-Frank is broad. As a result, to implement its 848 pages, specific rules have to be written. Currently 30% complete, 8843 pages of rules have been articulated.

The 11 pages, for example, that focus on the Volcker Rule are about diminishing banks’ risky behavior. Implementing those 11 pages, 4 regulatory agencies wrote a 298 page proposal with 383 questions and 1420 “subquestions.” Called an interactive Volcker rule map, it has 355 steps.

One agency that the law created has begun to function. In the news recently, the Consumer Finance Protection Bureau initiated a suit against Capital One Financial. For deceptive marketing of consumer credit cards, Capital One has been fined $210 million.

How to assess Dodd Frank?

Supported by President Obama and opposed by Mitt Romney, Dodd-Frank had its second birthday on July 21. There is a definitive Democratic/Republican divide on the Act. While most of us agree that many financial institutions engaged in wrongdoing, we disagree about how to constrain them in the future.

And that returns us to Dr. Zingales. For you, does Dodd-Frank evoke more or less trust in our financial system? Your answer should help you select your candidate.

Here is the complete transcript and link to the podcast of Dr. Zingales’s excellent econtalk interview while this Davis-Polk interactive displays the current status of Dodd-Frank’s implementation. For more on the law itself, here is its text and here is an econlife post on it.

Election Economics Topics:

Outsourcing: 7/16.

Posted by: adminEcon
Tags: Consumer Finance Protection Bureau, Dodd-Frank, Econtalk, financial regulation, financial trust, investment, J.P. Morgan & Co., Luigi Zingales, Mitt Romney, President Obama, securities, stock markets, Volcker Rule
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