“Regulatory Uncertainty”
The New York Times reports today that the Republican presidential candidates have decided to make their opposition to the Dodd-Frank financial-reform act a centerpiece of their campaigns. They complain about the effect of “regulatory uncertainty” on the economy, though it’s clear that the part of “regulatory uncertainty” that bothers them is not the uncertainty but the regulation. Three-quarters of the hundreds of regulations the act authorizes haven’t even been written yet. Obviously, the sooner they’re written and enforced, the less uncertainty there will be. So if “regulatory uncertainty” were the Republicans’ real concern, they would quickly get behind efforts to implement the act, which is designed to protect consumers from unscrupulous lending practices and taxpayers from more bailouts. Instead, of course, Republicans on Capitol Hill have been stalling, starving, and sabotaging the agencies charged with working out the details of the Dodd-Frank Act.
This controversy is not about uncertainty at all, but about risk, and who has to bear it. If taxpayers are going to be expected to bail out financial institutions that are too big to fail, then their elected representatives ought to do everything possible to make failure less likely, even if that also makes the institutions less profitable to their shareholders. The big banks obviously don’t like this. They would prefer that the government continue to let them take whatever risks they like — and continue to rescue them whenever their high-risk activities bring them to grief. The Republican presidential candidates, as well as the GOP congressional caucus, appear to believe that whatever keeps profits down on Wall Street is bad for Wall Street, and that whatever is bad for Wall Street is worse for the American economy. This commutative property of their discredited economic theory allows them to defend Wall Street’s interests without ever having to mention Wall Street itself: you will hear them warning that the financial-reform act will cost us jobs, not that it will make investment banking less lucrative (which it probably will, and probably should).
None of the Republican candidates dares to deny that the Dodd-Frank Act will make the financial industry safer, but there is some (mostly tacit) disagreement among them about what to do when the underregulated financial industry they wish to preserve explodes again as it did in 2008. Some of the candidates — call them the honorable fantasists — have been steadfastly opposed to bailouts: if the bankers run aground again, let them all drown; that’s capitalism. This position is honorable because it’s consistent. It’s fantasy because it fails to acknowledge a basic fact about modern economies like ours: what economists call “externalities.” If investment bankers and hedge-fund managers were the only ones who suffered from their recklessness, then it might makes sense to say, with Ron Paul and Michele Bachmann, that the government should just leave Wall Street alone, to get rich or go broke trying. But of course this is not what really happens. What happens is what happened just a couple of years ago — and what is still happening now, as the economy struggles to make up for all the jobs lost after the financial crisis. When the whole financial industry screws up, everyone suffers. Innocence offers no protection when microeconomic imperatives cause a macroeconomic meltdown. This is why it makes sense for an institution designed to protect everyone’s interests — namely, the federal government — to force Wall Street to account for Main Street externalities, and that means more rigorous regulation.
What about the Republican candidates who aren’t fantasists? Well, they’re also not honorable. The Mitt Romneys of the world want to have it both ways: minimal regulation but also maximal insurance for financiers, to be paid for by taxpayers. Romney supported TARP; he will no doubt support the next TARP, too. And let there be no doubt: the time will come for another TARP if the Republicans succeed in scuttling the Dodd-Frank Act. Mitt Romney represents the interests of those who, as the Irishman put it, know which side their bread is buttered on: both f**king sides.
what really bothers them is not the uncertainty part of “regulatory uncertainty” but the regulation part. Three-quarters of the hundreds of regulations the act authorizes haven’t even been written yet
So — there is UNCERTAINTY about what THREE-QUARTERS of the HUNDREDS of reglations are going to be since they haven’t even been written yet. And business is not willing to act today because they don’t know what the rules are going to be tomorrow.
You know, it really is not necessary to reflexively reject and oppose everything that your political opponents say. Once in a while, what they say might have some merit, and you won’t end up proving their point while attempting to refute it.
“…both f**king sides.”
Hmmm, I really didn’t expect to read something like this here.
To what extent is financial reform high on voters’ list of priorities? And if it is important to voters, would Elizabeth Warren’s popularity be any kind of indicator how people feel about the issue? Is the Republican strategy to go after Dodd-Frank a smart one? Or not?
Bender said: “So — there is UNCERTAINTY about what THREE-QUARTERS of the HUNDREDS of reglations are going to be since they haven’t even been written yet. And business is not willing to act today because they don’t know what the rules are going to be tomorrow.
You know, it really is not necessary to reflexively reject and oppose everything that your political opponents say. Once in a while, what they say might have some merit, and you won’t end up proving their point while attempting to refute it.”
If for some reason people were being asked to vote on unwritten rules, you might have a point. But Matt’s point is that the GOP is doing what you accuse him of doing; opposing regulations because they oppose regulation out of “principle”. The least they could do is wait until the regulations are written and then put them to a vote.
How far we have moved from a financial meltdown in an unregulated part of the economy to people arguing in the midst of a severe recession that we have put this all behind us and we no longer need the regulations that might have prevented the meltdown in the first place.
“How far we have moved from a financial meltdown in an unregulated part of the economy to people arguing in the midst of a severe recession that we have put this all behind us and we no longer need the regulations that might have prevented the meltdown in the first place.”
But do you think that is true? Even with our short memories, I just can’t imagine a campaign promoting bank deregulation winning a lot of votes.
Businessmen like to privatize profits and socialize costs and losses.
I remember an article in the Wall Street Journal that criticized proposed Federal regulations to control pollution by trucks. The author claimed, perhaps accurately, that it would be less expensive overall to let the trucks keep polluting and to sweep the streets and clean the clothes that the trucks had left a diesel residue on.
But notice:in this arrangement the trucking companies kept the profit, and the cost was born by cities and private individuals. This is considered an ideal arrangement by businessmen,, who in turn buy i.e., make campaign contributions to) politicians who will favor such an arrangement.
And I speak as a Republican and free market conservative. Capitalism is a matter of profit and loss, which should be borne by the same enterprise, which should not be allowed to keep the profits and slough off the losses and costs to the public.
This is the money quote from the NY Times article: “Unless Republicans capture the presidency and can also muster 60 votes in the Senate, it appears unlikely that Dodd-Frank will be repealed in full. Senate and House Republicans introduced such bills, but they have never been brought up for floor votes.”
The call to have Dodd-Frank repealed is political theater.
The official websites of Rick Perry and Mitt Romney (whom I consider to be the only candidates with any relevance, until Republican primary voters demonstrate otherwise) don’t list Dodd Frank or financial market reform as issues on the Issues pages of their respective official websites. It doesn’t seem to be a top-tier issue for either of them.
Rick Perry’s views on Dodd Frank seem to consist of, ‘we need to repeal it right away.’ I haven’t seen anything more substantive.
Mitt Romney’s views seem to be a bit more nuanced. From what I can tell, they are as follows:
* He has always opposed it
* Fairly recently (since early last summer), he has actually been calling for its repeal (which, as president, he couldn’t do without Congress’ cooperation)
* He has admitted that there are some good provisions in it, particularly around regulating derivatives and other exotic instruments
* He believes it favors Wall Street and the big banks, at the expense of Main Street businesses and community-based banks.
Dodd Frank is not exempt from criticism on its own merits. The last bullet point above is not unique to Romney – a number of conservative politicians and commentators have been using it as a talking point. That is a Tea Party play: the Tea Party is nearly as suspicious of Wall Street as it is of Washington.
And there are experts who doubt that Dodd Frank will prevent a too-big-to-fail scenario from repeating itself. If that scenario were to play out (God forbid), it’s reasonable to suppose that the American consensus will be that Dodd Frank isn’t worth the trees that were killed to print it out.
I believe Dodd Frank was passed in both houses on straight-party voting, i.e. it is yet another major Obama initiative that was enacted with an utter lack of bipartisan support. The downside of straight-partisan legislation is that the other party is completely free to hammer and hammer away with a clear conscience. Expect it to continue.
In capitalism, the “market” is a social construct and therefore risk can have social implications. The purpose of regulation in capitalism is to simply make social risk transparent and/or to change risk’s parameters via fines, taxes, or sanctions. While some pure free market theorists believe that the market itself will make risk transparent (and that regulation is therefore not necessary) hundreds of years of capitalist history shows us that wider social risks are not necessarily apparent and that capitalists will not necessarily avoid risks in a way that benefits society at large.
It is a act that some business interests oppose regulations because a lack of transparency and the subsequent wider spreading of risk away from themselves gives them a social advantage. But regulation always comes with costs, both to business and to the taxpayer. And often enough the wide net cast by a regulation appears arbitrary, ill formed, unnecessary, or too expensive when measured against its positive returns. So while I will argue that regulation is absolutely necessary, since the market cannot regulate itself, regulations have to be weighed carefully.
Some people will enter the discussion of good regulation/bad regulation in bad faith. But there are other people suffering from a philosophical disorder called “libertarianism” who claim to be against regulation as such. In a libertarian world, the market isn’t social. It is the aggregation of free individuals. While no sophisticated libertarian will argue that all risks are transparent, they will argue that risks are what they are and that it is the individuals personal and sole responsibility to face them, overcome them, or suffer them. Government in this picture is an arbitrary source of illegitimate power whose function is to assert itself over individuals’ rights.
In our current political environment, proponents of libertarianism try to capture the anger and confusion that people have about specific regulations (anger and confusion that they also fan) to create a bogus “principle” against regulation as such. Some business interests hop aboard this bad faith bandwagon, because in many ways it is easier to mobilize people against all regulations than against some regulations. Lost in this, or course, is the fact that everyone benefits from some regulations and the purveyors of anti-regulation have no intention of eliminating the ones that benefit themselves.
“You know, it really is not necessary to reflexively reject and oppose everything that your political opponents say. Once in a while, what they say might have some merit, and you won’t end up proving their point while attempting to refute it.””
It strikes me that this advice should be considered by more than just Bender. For you see the critics of Dodd-Frank are diverse and bipartisan. The politicians, being politicians, have reduced many of these criticisms (including the sheer amount of unwritten rules – not just regulation in “principle”) to (awful) soundbites, but the criticisms are there and are familar to those who work in the areas of securities law, corporate finance, and the SEC. Indeed at a legal conference this past Spring, I listened to a well-known New York corporate lawyer (and major Democratic fundraiser) rail against Dodd-Frank. So perhaps insteand of reflexively dismissing GOP criticism of Dodd-Frank, we might consider the criticisms.
As for the article, I think we all agree with this statement: “If taxpayers are going to be expected to bail out financial institutions that are too big to fail, then their elected representatives ought to do everything possible to make failure less likely, even if that also makes the institutions less profitable to their shareholders.”
The central problem, according to the most insightful critics, is that Dodd-Frank has made this MORE likely rather than less likely. I’d start with the testimony of Hal Scott from Harvard:
http://www.capmktsreg.org/pdfs/2011.07.21_Senate_Statement.pdf
Anti-Washington-regulation has been standard Republican boillerplate since I started to pay attention in the 1970s. Probably it was around for years before that.
Perhaps I’m naive, but I don’t think the American public will accept a straight repeal of Dodd Frank and a return to the status quo ante. And it’s impossible to imagine that the public would be in favor of *less* regulation than the status quo ante.
Even if there was such a GOP landslide in 2012 that Republicans gained control of the White House and picked up a filibuster-proof majority in the Senate, and even if they determined that this issue was worthy of spending political capital on, they’d need to replace Dodd Frank with something else – they’d need a realistic and politically viable plan.
Some tweaking of Dodd Frank strikes me as the most realistic. Unless there is a major realignment in the Senate (which is possible but probably not likely), even that seems a long shot unless a bout of bipartisanship breaks out.
In reading some of the comments, I think there’s a third way here that is being overlooked: it’s not just “to regulate or not to regulate,” but maybe instead it’s regulate in a way that makes sense and achieves the goals in a way that doesn’t impose further externalities/costs on an institution/market/system that, over the long haul, has vastly improved the wealth of most Americans. I think that’s Prof. Scott’s criticism: it’s not just that we have untold numbers of unwritten regulations, but the process of writing the regs is unrealistic and poses another risk that we should step back from and look at. Indeed Pres. Obama has said this very thing it seems to me in having Cass Sunstein’s office (with whatever ominous sounding government name it has) reviewing and streamlining regulations.
The public’s eyes glaze over with any discussion of economic reform that involves five more words than a sound bite. Some know who Dodd and Frank are and that’s enough to settle it for both sides. Next!
“In reading some of the comments, I think there’s a third way here that is being overlooked: it’s not just “to regulate or not to regulate,” but maybe instead it’s regulate in a way that makes sense and achieves the goals in a way that doesn’t impose further externalities/costs on an institution/market/system that, over the long haul, has vastly improved the wealth of most Americans.”
As I mentioned, regulations by their nature impose externalities and costs; that’s the point. And yes, while over the “long haul” the wealth of Americans has been vastly improved by the system, but in the short term we have seen a net loss that we don’t want to repeat.
“As I mentioned, regulations by their nature impose externalities and costs; that’s the point.”
Actually, not totally. The point of the regulations is that benefits they bring outweigh the intrinsic costs they impose (indeed the President’s Executive Order establishing Cass Sunstein’s office makes this very point: no regulation should stand whose benefits are outweighed by its costs). This is the very essence of the debate we’re having, so just to say “regulate” or “don’t regulate” doesn’t move the ball very much.
As for the loss, as the old saying goes “Don’t throw the baby out with the bathwater.”
For those interested, Ezra Klein has just linked to an incredibly helpful blog post distilling the various policy debates with regard to the economic malaise. It’s helpful not only because it distills the essential debates into some diagrams, it provides links to some of the analysis.
http://rortybomb.wordpress.com/2011/09/21/a-topological-mapping-of-explanations-and-policy-solutions-to-our-weak-economy/
I want to note his description of the 2 “conservative” camps, and suggest that much of the criticism asserted against the GOP here has focused on the first camp (“uncertainty”) rather than the second camp (“long term problems”). Some of that is justifiable because the candidates have focused more on the first argument, but the second camp is where I tend to fall, and as such, see the “to regulate or not to regulate” debate as useless, if not politically understandable. Unfortunately the more articulate would-be candidates who passed on this cycle also have tended to fall in the second camp (I think of Mitch Daniels in particular).
“The point of the regulations is that benefits they bring outweigh the intrinsic costs they impose (indeed the President’s Executive Order establishing Cass Sunstein’s office makes this very point: no regulation should stand whose benefits are outweighed by its costs). This is the very essence of the debate we’re having, so just to say “regulate” or “don’t regulate” doesn’t move the ball very much.”
Regulations move risk from one place to another. This means that they don’t benefit everyone. So the question is not one of some intrinsic cost of a regulation but on the relative political power of those who benefit against those who pay the cost (noting that people who pay the cost can sometimes also benefit).
I agree that the regulate/don’t regulate thing doesn’t get us anywhere. But it is out there and there are people both supporting it financially and rallying around it politically, so these people are players in the game.
“I agree that the regulate/don’t regulate thing doesn’t get us anywhere. But it is out there and there are people both supporting it financially and rallying around it politically, so these people are players in the game.”
No doubt about that.
I just received an e-mail from Chase saying, as a current customer, I can refinance my mortgage up to 125% of my home’s current value, with low documentation. Seems just like old times.
One thing is for sure. Whether the banks will or won’t regulate themselves (and hence have no need for aggressive federal regulation), recent events show that they CAN’T regulate themselves.
Hi, Irene, I believe Chase was bailed out. I think you’ve just experienced the moral hazard we were warned about when we decided to bail out the big financial players: if Chase believes it is too big to fail – in which belief it may very well be correct – then it can be pretty sure it will always get bailed out, so why not take imprudent risks in pursuit of the very highest profits?