[[Blinder asks: why no financial reform? My answers:
(1) there is no serious force that countervails the power of the financial capitalist. We don't have a social-democratic movement -- or any serious labor unions outside of the government and Truthout -- that could force the financiers to take their medicine. The main battle is DC is between those promoting the finance sector's short-term aims and those looking for long-term stability (which would serve finance's long-term goals). But those opposed to finance's immediate greed are largely disorganized. Manufacturing capitalists, for example, either do not care; are falling apart (GM, etc.); or are financial organizations themselves (GM, etc.) (2) so far, the crisis is not as bad as that of the early 1930s. If the entire finance sector had been allowed to melt down the way Lehman Brothers did, _then_ the finance guys would embrace reform. Ironically, the kind of "save" of the financial sector instituted by Hank Paulson _et al_ and that of the real economy (via fiscal policy) may have prevented the creation of a sufficient basis for the financial reform that those favoring long-term stability would prefer. It's ironic: mainstream economists have long bragged that if anything like the Great Depression ever happened again, we would know how to fix it. But the fix put into place (based, more or less, on mainstream economics) might prevent the kind of financial reform needed to prevent a new Depression or a long period of stagnation.]] The New York Times / September 6, 2009 Economic View The Wait for Financial Reform By ALAN S. BLINDER BACK during the Obama transition, the newly designated chief of staff, Rahm Emanuel, enunciated what I’ll call the Emanuel Principle: “You don’t ever want a crisis to go to waste,” he said. “It’s an opportunity to do important things that you would otherwise avoid.” He was right. But I fear that the Emanuel Principle is about to be violated in the case of financial reform. We are barely emerging from the greatest financial crisis since the 1930s. From last September to March, it was downright frightening. Yet by the time Congress left town for its summer recess, financial reform appeared to be losing steam. Monday is Labor Day, the psychological end of summer. So, starting on Tuesday, it’s up to the administration and the Congressional leadership to breathe some life into what’s left of the reform concept. After all we’ve been through, and with so much anger still directed at financial miscreants, the political indifference toward financial reform is somewhere between maddening and tragic. Why is the pulse of reform so faint? I see five main reasons: IT’S YESTERDAY’S PROBLEM People have an amazing capacity to forget. Our financial system is now functioning much better than it was in March or last fall. So the Alfred E. Neuman Principle (“What, me worry?”) threatens to displace the Emanuel Principle. You can see public attention shifting elsewhere — to the budget, to health care, to torture, you name it — not to mention baseball and football. I want to scream, “Stop!” The financial regulatory system needs fixing, and to accomplish it, Congress will have to hold a lot of feet to a lot of fires. It’s not clear that many members have the stomach for that. LOST IN THE CROWD The problem of short attention spans has a first cousin: the overcrowded legislative agenda, which has spread the resources and time of Congress and the administration thinly over a vast array of issues. There is a budget to pass, health insurance to reform, energy to cap and trade, schools to overhaul, two wars to watch over and others to avoid — and more. Amid all of this, the Treasury has sent Congress 16 pieces of financial reform legislation, totaling 618 pages. What are the chances that these 16 bills will surface to the top of the legislative agenda? THE MOTHER OF ALL LOBBIES Almost everything becomes lobbied to death in Washington. In the case of financial reform, the money at stake is mind-boggling, and one financial industry after another will go to the mat to fight any provision that might hurt it. But your exercise instructor had it right: no pain, no gain. If we don’t inflict a modicum of pain on financial players — not out of spite, but because the system needs change — we will accomplish little. BUREAUCRATIC INFIGHTING Industry lobbyists are not the only problem. Regulatory deck chairs need to be rearranged, and various government agencies are scrambling to maintain or expand their turfs. So, for example, other regulators don’t want to lose influence to the Federal Reserve, and the Fed doesn’t want to give up its consumer protection functions — two changes that Treasury proposes. The bureaucratic turf wars have grown intense, with Timothy F. Geithner, the Treasury secretary, reportedly berating regulators at a meeting last month. A LACK OF FOCUS Perhaps worst of all, it’s hard to keep the public engaged in something as complex, arcane and — frankly — as boring as financial regulation. We have a heavily checked-and-balanced political system. To get anything done, one must overcome both a strong status-quo bias and powerful lobbying. Normally, that requires constituents to pressure their elected representatives — hard. Today, the electorate has a vague sense that it has been ripped off and that change is needed. But the sentiment is unfocused and inchoate — with these two exceptions: People clearly want greater consumer protection and restrictions on executive pay. By no coincidence, those are the two pieces of financial reform that seem most likely to survive the Congressional sausage grinder. Don’t get me wrong; we need both. But the two don’t constitute the entirety of reform, or even its most important parts. I’d attach greater importance to at least three major Treasury proposals that may wind up on the cutting-room floor: First, we need a systemic risk monitor or regulator. A monitor just watches risks develop and issues warnings, while a regulator is empowered to take action. In my last column, I explained the reasons for wanting a systemic risk regulator, and why the Fed should get the job. [[as Dean Baker points out, if Alan Greedspan and the usual gang of financial idiots -- including Blinder -- had been running the Fed and "regulating" systematic risk in the build-up to 2008, they would have done a really poor job, since they pooh-poohed the whole idea of systematic risk at the time. It's like Milton Friedman's idea that the Great Depression could have been prevented if he had run the Fed and/or his rules had been applied in 1927 or so and after. Time is like a river; you can't step into the same river twice. ]] Second, we need a new mechanism to euthanize or rehabilitate giant financial institutions whose failure could threaten the whole system. Lehman was put into Chapter 11, with catastrophic effects. A.I.G. was turned into an appallingly expensive ward of the state. There must be no more situations like these. As both Mr. Geithner and Ben S. Bernanke, the Fed chairman, have observed, we need a better way out. Third, something serious must be done to tame — though not to destroy — the derivatives markets. Today, virtually all derivatives trading remains unregulated and nontransparent. Much of it also has too little capital and, at crucial times, too little collateral behind it. The Treasury’s draft legislation proposes to fix these problems by standardizing many derivatives and pushing trading into clearinghouses or organized exchanges, where more capital would be required and collateral would have to be posted often. And there is a great deal more in those 618 pages. So let’s get on with the job, remembering the Emanuel Principle. There will never be a better time “to do important things” for our financial system. Alan S. Blinder is a professor of economics and public affairs at Princeton. He was an economic adviser to President Bill Clinton and vice chairman of the Federal Reserve. Copyright 2009 The New York Times Company -- Jim Devine / "laugh if you want to / really is kinda funny / cause the world is a car / and you're the crash test dummy" -- Devil Makes Three. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
