The House and the Fed go in opposite directions on financial market oversight.

December 10th, 2014 at 10:03 am

Ensuring that financial institutions have adequate capital buffers is an essential line of defense against the bubbles and busts that have characterized the US business cycle in recent decades, at great cost to the living standards of most households. So I was happy to see the Fed’s proposal to kick up banks’ reserve requirements, especially for the ones involved in more complex, riskier trades.

And then there’s the House. I give them some credit for coming up with a 92% omnibus budget bill, where, unlike the continuing resolutions they’ve relied on in recent years, they appropriated new spending levels for 11 out of 12 agencies through next September. The exception is Homeland Security, which just gets a CR through February—their way of complaining about the President’s recent immigration action.

But they also jammed in some language to weaken aspects of Dodd-Frank, most notably a measure intended to hive off derivative trading from the part of the bank that’s insured by taxpayers. According to the NYT, this attack on the “Volcker rule” was largely written by Citibank…not good.

The bill that Citigroup helped draft: This bill would repeal one of the more contentious provisions in Dodd Frank, requirement that banks “push out” some derivatives trading into separate units that are not backed by the government’s deposit insurance fund. The proponents of the push­out rule argued that it would isolate risky trading from parts of a bank eligible for a government bailout.

My understanding of the new House measure is that it doesn’t repeal “push-out,” but instead pulls back in a bunch of categories of derivative trades—exempting them from Volcker coverage.

There are some other big problems with the agreed upon spending levels in the House bill, one of which—a cut to the IRS budget—that I’ll write about ASAP as this is a real concern of mine. In my view, it’s basically House R’s trying to promote and facilitate more tax avoidance.

The contrast between the Fed and the Congress on the fin reg stuff is just a crystal clear lesson on the value of political independence at the Fed. Yes, their regulators suffer market capture too–look at their inaction around housing bubble. I could also see pushing the equity buffer up higher than is being proposed; the risk here is almost always on the side of doing too little. Also, risk-weighting the buffers—requiring more exposed institutions to hold more capital–is probably more art than science, and whenever there’s leeway in this sort of market regulation there’s the strong potential for regulatory capture/failure.

But there’s just no question that the Congress is a shopping mall for the banking lobby in a way that the Fed is not.

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4 comments in reply to "The House and the Fed go in opposite directions on financial market oversight."

  1. Peter K. says:

    Conservatives who want the Fed to raise rates to head of possible inflation should instead work for more, better regulations to keep bubbles from blowing and keep the financial sector more stable.


  2. readerOfTeaLeaves says:

    It’s become clear that:
    (1) Congress has no clue how wealth is actually created, leaving it vulnerable to claims that finance and financialization ‘increase wealth’; they don’t.
    Finance commoditizes debt; it makes debt increasingly profitable for an increasingly-concentrated financial elite.

    (2) Because Congress has allowed Wall Street to make policy, debt (public and private) has become a ‘profit center’ for finance, and for financial elites. As this process has compounded over the past several decades, the public contempt for Congress has intensified.

    (3) Congress is grasping at straws, policy-wise (probably because they don’t have a clear agreement about what actually creates wealth and prosperity). This leaves Congress vulnerable to being bamboozled by Wall Street wailing over derivative regulations.

    (4) Continuing to allow Wall Street to write the regs further delegitimizes government. We have a crisis of legitimacy, both in politics and in economics.


    • Jared Bernstein says:

      Corporate debt is also very much favored by our tax code.


      • readerOfTeaLeaves says:

        Boy, howdy!
        The implications that stem from the US tax code favoring corporate debt is an untold scandal.
        I don’t think it’s on the public radar, which is tragic.

        One of the best things that I’ve read in 2014 was a piece by David Stockman, of all people. (I now read his Contra Corner daily; he writes superbly.) Stockman’s explanation of how IBM is cannibalizing itself via stock buy-backs and corporate debt is one of the most informative things that I’ve read this year. Depressing, but informative. His post belongs in a time capsule:
        http://davidstockmanscontracorner.com/the-canary-in-big-blues-mainframe-why-ibms-q3-bust-marks-a-turning-point/

        People like Mitt Romney are complicit in all of this – creating corporate debt (for company employees to pay off) has made them enormously wealthy. Romney personifies some of the vested interests in maintaining the tax code’s tilt toward corporate debt. Without it, their business models would flounder.

        But in the bigger picture, if I understand the dynamics correctly, favoring corporate debt in the tax code has wrought havoc for American business over time; we might even identify corporate debt as a factor contributing to ‘secular stagnation’.

        It’s a mighty safe bet that few in Congress grasp the way in which the tax code’s emphasis on corporate debt is corrosive for American businesses. But that very point seems to me more evidence that Congress is fundamentally clueless about what actually generates wealth and prosperity.


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