FinReg Brings Us Back To Waterloo, Yet Again

Simon Johnson at Baseline Scenario:

The bank lobbyists have the champagne out – the Brown-Kaufman amendment, which would have capped the size and leverage of our largest banks – was defeated in the Senate last night, 33-61.  Feeling ascendant, the big banks swarm forward to take on their next foe – the Kanjorski amendment (that would greatly strengthen the power of regulators to break up megabanks), which they plan to gut in the backrooms.

This is overconfidence – because the consensus against them is beginning to shift significantly.  Partly this is the result of great efforts by Senator Ted Kaufman, Senator Sherrod Brown, and their colleagues over recent months and weeks.  Partly this is due to all the people who came on board and pushed hard.

But, as in many such cases, it is also a question of luck – and timing.

The European sovereign debt crisis is deepening.  And the picture that is worth many thousands of words is the NYT’s graph of interlocking debt within the eurozone.

As far as anyone can ascertain, this is almost all debt held by banks (often then “repo-ing”, or borrowing against it as collateral, at the European Central Bank.)

In other words, the European megabanks – lauded by Senators Dodd, Corker, Warner and others as a model for us to follow – are up to the eyeballs in bad debt.  Their governance has completely failed.  Their regulatory systems have been gutted – on their way to being turned into ash.

None of this would matter, of course, if the eurozone policy elite had its act together and could terminate its current position with minimal losses.  But it cannot – the deer are in the headlights.


To the victors last night in the Senate: congratulations – your opponents have fallen back.  Your generals are known to be invincible, your forces are the best, and your resources are without limit.

And so we wait for you again, on a gentle slope and behind a ridge – appropriately enough with our backs to Brussels.  Welcome to Waterloo.

Jane Hamsher at Firedoglake:

The Kaufman “break up the banks” bill got drubbed tonight because it was perceived as a Democratic bill and the banks could work through the GOP to kill it, which gave the ConservaDems cover for opposing it too.

But nobody got on the floor of the Senate today to speak against Audit the Fed.  They were all scared shitless.  The left/right coalition supporting the bill  includes everyone from Richard Trumka, Bill Black, Andy Stern and Jamie Galbraith to Grover Norquist, the Campaign for Liberty and Freedomworks on the right.   We worked hard to put that coalition together for the past year, and it was transpartisan by design.  If you stood against Audit the Fed, you were  just a  shill for the banks.  There’s no justification.  It made the dividing lines extremely clear: populism vs. corporatism, with no ability to take refuge in the safe crannies of partisanship.

It took a lot of courage for the people involved in that coalition to join together and say “enough.” Party hacks on both sides launched endless personal attacks against those involved, accusing them of “consorting with the enemy” in a desperate attempt to restore a disfunctional chess board.  But everyone stood their ground, and when all else failed, the White House put the squeeze on Bernie Sanders.

David Dayen at Firedoglake:

Only, outside of a couple upstart groups like A New Way Forward, the progressive movement determined it not a cause worth fighting for. It’s just a plain fact that breaking up the mega-banks would have 10,000 times the impact of the public option – or auditing the Fed, for that matter – and absolutely nobody in the progressive coalition cared. There’s no doubt that something this transformative was a tough road – the White House didn’t go totally on the record but they weren’t exactly for it, with the Treasury Department’s Neal Wollin saying in a press event yesterday that “What’s really key about this is that the institutions be less risky, that they not pose threats to the broader system.  Size is one attribute with respect to risk, but there are other attributes.” Given the political capture of our governmental system by Wall Street, something of this magnitude was always a high climb.

And yet it got three more Republican votes than the public option ever got in its history. Yesterday, at the Financial Crisis Inquiry Commission, Henry Paulson – Henry Paulson! – came out for it, saying “we should not move ourselves back to a system of consolidated, monolithic commercial banks.” Alan Greenspan – Alan Greenspan! – said in March that Federal Reserve data showed no positive effect from economies of scale for anything but a mid-sized banking institution, pinpointed at only around $100 billion in assets (some of our banks are over a trillion right now). Conservative academics supported it. Republicans in the Senate made the argument for everyone, saying that the current bill didn’t stop too big to fail.

But practically nobody on the progressive side foresaw its power, its simplicity, preferred to look at other priorities, and Wall Street won big in a time when their political influence is at a low ebb. That 28 Democrats will get off the hook with this vote, because nobody bothered to look into it, is astonishing, given those facts.

This is a failure of the progressive movement. You fight the fights worth fighting for, and nothing – nothing – has been more worth fighting for, which got a vote on the floor of the Senate during the Obama Presidency, than this. Nothing at all. It’s a viciously cruel irony that a coalition called Mobilize For Our Economy just formed on the DAY that the Safe Banking Act went down to defeat.

Jane claims that “the Kaufman “break up the banks” bill got drubbed tonight because it was perceived as a Democratic bill and the banks could work through the GOP to kill it, which gave the ConservaDems cover for opposing it too.” If this were true, there was never any reason to spend six months on a public option campaign, because Safe Banking was far more bipartisan and far more transformational. It may not have had bright shiny poll numbers that could be touted, but that would be because nobody ever tried to force it into the national conversation. We have a problem with financial behemoths that cannot be regulated. It’s at the root of everything we’ve seen in the economy in the last decade. If you’re not willing to fight that fight you’re not really willing to change anything.

On that midday press conference, Kaufman referenced the big drop of the stock market and said, “The idea that there’s not going to be another financial crisis is a victory of hope over reality.” The idea that progressives were either blindsided, completely unaware or too preoccupied with whatever other nonsense to whip this vote is a victory of cynicism over hope.

Reihan Salam:

My guess is that Dayen and I disagree on many things, but my sense is that while the Safe Banking Amendment was far from flawless — I’m still not convinced that size is as centrally important as the bill’s sponsors, and its intellectual architects Simon Johnson and James Kwak, believe — it did include a variety of other measures that would really would alleviate the TBTF problem, thus making it a pretty decent second best option. The fact that it attracted the support of three reliably conservative senators — Shelby, Ensign, and Coburn — suggests that this was a lost opportunity for the right. Now that the bulk of the Republican caucus has coalesced around the Dodd bill, plus trivial tweaks, Senate Republicans have left close observers scratching their heads: if this is the endgame, why fight back at all?

Tim Fernholz at Tapped:

There won’t be any votes today or Monday, but there was one more positive development yesterday: A compromise has been reached on Sen. Bernie Sanders’ bill to audit the Fed, which will apparently allow for more transparency while protecting independent monetary policy. That means the White House and Senate leaders are supporting the amendment. If progressive economist Dean Baker thinks the deal is a win for reformers, it probably is.

Dean Baker at Talking Points Memo:

The effort to audit the Fed got a big boost last night when Senator Bernie Sanders reached an agreement with Chris Dodd, the chair of the banking committee. Under the deal, the Government Accountability Office (GAO) would undertake a full audit of the special facilities created by the Fed since December of 2007. GAO would make the findings from its audit available to the Congressional leadership. It would also make most of the details of the Fed’s transactions available to the public.

To cope with the economic crisis, the Fed created 13 different special lending facilities. At their peak last year, these facilities had lent out more than $2 trillion. The Fed has only disclosed aggregate data about these facilities, telling us how much each one lent out month by month. It has refused to disclose any information about the specific loans and beneficiaries. This means that we have no way of knowing how much Citigroup, Goldman Sachs or anyone else benefited from these facilities.

Under the terms of the deal, by December 1 of this year the Fed will have posted on its website all the loans that were part of these facilities. Any interested journalist, academic, blogger or generic snoop can read through the data and find exactly how much money Goldman Sachs got, at what interest rate, with what collateral and when they paid it back. This is a big victory.

More Dayen, on Baker:

Yes it is, and as I have come to understand, the entire point of conducting an audit of the Fed was to get at these special lending facilities. “What have you done with our money” was the key question, which will be answered under the terms of this deal (which still has to go through a conference committee and a final vote, mind you).

Now I know Ron Paul and some libertarians are angered by this deal. But understand that Ron Paul doesn’t want an audit of the Federal Reserve. He wants to end the Federal Reserve. The best-selling book “End the Fed” that he wrote tipped me off to this. He wants to go back to hard-money policies and a return to the gold standard. Now, you can argue that this would end the cartel of central bankers scheming with their monetary policy, or that it would turn US monetary policy into the inflation-uber-alles laissez-faire mess we’re seeing in Europe that is threatening a global depression. The consequences for Paul’s favored end-state would be catastrophic if implemented in real time. This Fed is failing in different ways – and their actions should draw more scrutiny – but eliminating it would return us to the Stone Age.

And so you should probably know who you’re dealing with. There’s no good reason for the restrictions on this particular audit, but in its streamlined form, it seeks to answer one question – what did the Fed do on an emergency basis with two trillion dollars in taxpayer money. Not only does the Sanders amendment force an answer to that question, it opens it up to public scrutiny in ways that Paul-Grayson didn’t. As Baker says, this is a beginning and not an ending for transparency and accountability.

David Vitter may offer the original proposal for a vote and more power to him. But an audit really is just an audit. Ron Paul wanted to use an audit as a tool to destroy the Fed.

Meanwhile I think there’s some needed perspective here. Fed transparency is important but it pales in comparison to the very real efforts to force fundamental changes to how Wall Street operates, changes that have thus far been batted down without people batting an eyelash. That has been the ongoing failure of this debate, sidetracked over an issue (however important) about opening up the books rather than ones that would actually legitimately constrain the runaway finance sector.

Ezra Klein:

As the FinReg process has pushed forward, controversy has centered around two amendments: Bernie Sanders’s proposal to audit the Federal Reserve and a proposal by Sherrod Brown (pictured) and Ted Kaufman to break up large banks. Grouping the two of these together has been a little bit weird; one transforms Wall Street while the other directs a government agency to keep us abreast of what they’re doing with our money.

But the Federal Reserve has fought the effort for transparency as if it were an effort to break them apart. Ben Bernanke’s letter on the subject sounds alarmed, to say the least. But because the Fed was never able to make a very good case that their new powers shouldn’t result in somewhat more transparency, they’ve lost. Now, a modified version of Sanders’s amendment seems sure to pass.

Conversely, the Brown-Kaufman proposal to break up the banks failed last night, 61 to 33. In some way, I’d say you’re seeing the fundamentals of these policies assert themselves. Audit the Fed is not a radical bill and it’s actually a bit hard to argue against it. Breaking up the banks makes a fair amount of sense, but it’s substantively a lot more radical than anything else in the legislation.


Leave a comment

Filed under Economics, Legislation Pending, The Crisis

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s