Is "Too Big To Fail" Too Big To Exist?
April 22, 2010 11:07 AM Subscribe
When we write this up, I'll guarantee you, before the ink is dry, some 22-year-old is going to come out and figure six different ways to get around what I've just written. Senate Banking Committee Chairman Chris Dodd on the proposed Restoring American Financial Stability Act [.pdf]
President Obama was in New York today to speak on financial regulation (more here).
But how will the legislation turn out? There are still some uncertainties: will we get the Volcker Rule and/or a Consumer Financial Protection Agency? Is the size of the banks the problem, or the complexity of the unregulated derivatives market?
Among the voices pushing for reform, MIT economist Simon Johnson (previously) has come out strongly in favor of limiting the size of the big banks, and is urging people to contact their representatives to support legislation to do so.
President Obama was in New York today to speak on financial regulation (more here).
But how will the legislation turn out? There are still some uncertainties: will we get the Volcker Rule and/or a Consumer Financial Protection Agency? Is the size of the banks the problem, or the complexity of the unregulated derivatives market?
Among the voices pushing for reform, MIT economist Simon Johnson (previously) has come out strongly in favor of limiting the size of the big banks, and is urging people to contact their representatives to support legislation to do so.
I think there should be a narrowly defined set of functions that banks can perform. Anything beyond that is forbidden, with harsh penalties for the slightest infractions. Companies that want to keep speculating can continue to do so, but they must be given an honest label. We'll call then 'Casinos.'
posted by mullingitover at 11:17 AM on April 22, 2010 [11 favorites]
posted by mullingitover at 11:17 AM on April 22, 2010 [11 favorites]
When we write this up, I'll guarantee you, before the ink is dry, some 22-year-old is going to come out and figure six different ways to get around what I've just written.
So writing legislation is more or less like posting to Metafilter?
posted by orange swan at 11:20 AM on April 22, 2010 [7 favorites]
So writing legislation is more or less like posting to Metafilter?
posted by orange swan at 11:20 AM on April 22, 2010 [7 favorites]
Companies that want to keep speculating can continue to do so, but they must be given an honest label. We'll call then 'Casinos.'
And suddenly, there are a lot of Native Americans around Wall Street, finding all sorts of unstaked holy lands and claiming sovereign status. Now that would be interesting.
posted by filthy light thief at 11:22 AM on April 22, 2010 [1 favorite]
And suddenly, there are a lot of Native Americans around Wall Street, finding all sorts of unstaked holy lands and claiming sovereign status. Now that would be interesting.
posted by filthy light thief at 11:22 AM on April 22, 2010 [1 favorite]
How about "you have to produce something of value in order to make money from it"?
posted by DU at 11:23 AM on April 22, 2010 [13 favorites]
posted by DU at 11:23 AM on April 22, 2010 [13 favorites]
Eh, why not write a bill that establishes that wealth is ephemeral and largely worthless, and that family is what really matters? Whatever happened to the family values that we elected these people on?
posted by mccarty.tim at 11:24 AM on April 22, 2010 [3 favorites]
posted by mccarty.tim at 11:24 AM on April 22, 2010 [3 favorites]
So, no more Dan Brown, no more Thomas Kincaid? I can't live in a world like that.
posted by stavrogin at 11:24 AM on April 22, 2010
posted by stavrogin at 11:24 AM on April 22, 2010
That's a nice thought, DU, but let me play the devil's advocate: Don't Wall Street and other investors provide the service of putting fallow money to work? The problem is that it's just gotten so complex that it's hard to see that that's what they're doing.
At least, that's how I think it works. I'm not sure how short selling fits into all this.
posted by mccarty.tim at 11:36 AM on April 22, 2010 [1 favorite]
At least, that's how I think it works. I'm not sure how short selling fits into all this.
posted by mccarty.tim at 11:36 AM on April 22, 2010 [1 favorite]
Eh, why not write a bill that establishes that wealth is ephemeral and largely worthless, and that family is what really matters?
Are you going to feed your family with family?
posted by Bathtub Bobsled at 11:38 AM on April 22, 2010 [3 favorites]
Are you going to feed your family with family?
posted by Bathtub Bobsled at 11:38 AM on April 22, 2010 [3 favorites]
Eh, why not write a bill that establishes that wealth is ephemeral and largely worthless, and that family is what really matters?
U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion
posted by Atom Eyes at 11:39 AM on April 22, 2010 [1 favorite]
U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion
posted by Atom Eyes at 11:39 AM on April 22, 2010 [1 favorite]
The senator is correct. I don't know what their official titles are, but I am quite sure there are legions of professional weasels whose only job is to get their moist little snouts stuffed in any tiny loophole that they can dig into and follow that delicious moneyscent emanating off of the soft white underbelly of the world's financial institutions. Preventative legislation is nice in theory, like a seatbelt, but, to be effective, outcome based punishments must be in place. Right now, we're legislating in such a fashion as to say, "You may not have bullets made of 95% lead" in the hopes that nobody gets shot. I think it would be more effective if we just put some waiting periods in place for handguns and then, whenever we saw a dead body, we try to figure out with what instrument they might have been murdered.
The financial punishments must be proportionate not only to the size of the offense, but additionally to the profit derived from the transgression and the total income of the company. The income noted ought to be whatever is the highest number of what their press releases and investor brochures tout. The "corporate death penalty" is too rarely invoked because, boo hoo, we must cry for the investors. Penalties must also descend upon people, simultaneous with the corporate punishment.
Too many things are hitting Enron-level scams for my taste. Prevention hasn't worked that well. It's time for
posted by adipocere at 11:44 AM on April 22, 2010 [7 favorites]
The financial punishments must be proportionate not only to the size of the offense, but additionally to the profit derived from the transgression and the total income of the company. The income noted ought to be whatever is the highest number of what their press releases and investor brochures tout. The "corporate death penalty" is too rarely invoked because, boo hoo, we must cry for the investors. Penalties must also descend upon people, simultaneous with the corporate punishment.
Too many things are hitting Enron-level scams for my taste. Prevention hasn't worked that well. It's time for
<darph_bobo>BLOODY! VENGEANCE!</darph_bobo>posted by adipocere at 11:44 AM on April 22, 2010 [7 favorites]
Don't Wall Street and other investors provide the service of putting fallow money to work?
Money doesn't work. And for whom is that a service?
posted by DU at 11:46 AM on April 22, 2010
Money doesn't work. And for whom is that a service?
posted by DU at 11:46 AM on April 22, 2010
I'd rather start from a position of "enforced penalties." Once that's established, then getting to degrees feels meaningful. Oversight rather than, um... oversight?
posted by Sweetdefenestration at 11:46 AM on April 22, 2010
posted by Sweetdefenestration at 11:46 AM on April 22, 2010
IHNC, IJLS moist little snouts
posted by Rat Spatula at 11:54 AM on April 22, 2010
posted by Rat Spatula at 11:54 AM on April 22, 2010
Before we get too far into a theoretical discussion of what constitutes value in a capitalist society, I thought I might drop in to strongly recommend reading the entirety of the Dodd interview in the first link of the FPP. It has some eye-opening stuff about the recent history of how the crisis unfolded (during the fall of 2008), as well as stuff like this:
CD: The first thing that happened was that you had a lot of unregulated entities…
EK: Shadow banks.
CD: Yeah. You need securitization, but the failure to have underwriting standards, the fact that they could go out and just lure people in, the no-doc loans, the fabrication of information. When you go to the Web sites of these brokers they said that the first thing you as a broker should do is convince the borrowers you're their financial adviser. I put that up in my first hearing. And of course they were anything but your financial adviser. , But then the bank was selling the loans off in eight to 10 weeks, so they were out of the game, and of course the rating agencies don't conduct due diligence. So it was just a series of dominoes that created this huge bubble and there was nothing underneath it
All of which suggests, to me at least, that fraud is built into the system itself.
posted by HP LaserJet P10006 at 11:54 AM on April 22, 2010 [1 favorite]
CD: The first thing that happened was that you had a lot of unregulated entities…
EK: Shadow banks.
CD: Yeah. You need securitization, but the failure to have underwriting standards, the fact that they could go out and just lure people in, the no-doc loans, the fabrication of information. When you go to the Web sites of these brokers they said that the first thing you as a broker should do is convince the borrowers you're their financial adviser. I put that up in my first hearing. And of course they were anything but your financial adviser. , But then the bank was selling the loans off in eight to 10 weeks, so they were out of the game, and of course the rating agencies don't conduct due diligence. So it was just a series of dominoes that created this huge bubble and there was nothing underneath it
All of which suggests, to me at least, that fraud is built into the system itself.
posted by HP LaserJet P10006 at 11:54 AM on April 22, 2010 [1 favorite]
How about "you have to produce something of value in order to make money from it"?
Wall Street would argue that it does produce value. The stock market, for example, helps companies raise money, provides a means for almost anyone to invest in companies, and gives investors a (admittedly small) say in how companies are run. Mergers and acquisitions allow companies to gracefully 'admit defeat' at the hands of a competitor and merge or be bought efficiently rather than dissolving or going bankrupt, which provides continuity for customers and investors. Mergers and acquisitions of non-competing companies provides a way for companies to grow into new markets efficiently rather than always starting from scratch.
Now, of course, you might say "the value of all that stuff is obvious. What about derivatives, credit default swaps, collateralized debt obligations, etc? Surely all of that provides no value except to the banks."
Wall Street would argue that more complex instruments provide value to society as well. Credit default swaps and CDOs, for example, are both ways of hedging against risk, which provides value to society by smoothing out some of the bumps in the economy. A CDS, for example, should make it less likely that a company defaulting on a loan will harm the value of your pension. CDOs (are supposed to) provide an efficient way for larger investors to fund mortgages. Even synthetic CDSs provide value because they create a market in the creditworthiness of companies and thus provide a way for investors to hedge against risk even if they aren't a creditor of the company in question.
Now, whether you buy any of that is another question, as is whether you think the benefit outweighs the cost or the risk, but there's at least a good-faith argument to be made that it's not just a casino built on playing with other people's money.
posted by jedicus at 11:55 AM on April 22, 2010 [6 favorites]
Wall Street would argue that it does produce value. The stock market, for example, helps companies raise money, provides a means for almost anyone to invest in companies, and gives investors a (admittedly small) say in how companies are run. Mergers and acquisitions allow companies to gracefully 'admit defeat' at the hands of a competitor and merge or be bought efficiently rather than dissolving or going bankrupt, which provides continuity for customers and investors. Mergers and acquisitions of non-competing companies provides a way for companies to grow into new markets efficiently rather than always starting from scratch.
Now, of course, you might say "the value of all that stuff is obvious. What about derivatives, credit default swaps, collateralized debt obligations, etc? Surely all of that provides no value except to the banks."
Wall Street would argue that more complex instruments provide value to society as well. Credit default swaps and CDOs, for example, are both ways of hedging against risk, which provides value to society by smoothing out some of the bumps in the economy. A CDS, for example, should make it less likely that a company defaulting on a loan will harm the value of your pension. CDOs (are supposed to) provide an efficient way for larger investors to fund mortgages. Even synthetic CDSs provide value because they create a market in the creditworthiness of companies and thus provide a way for investors to hedge against risk even if they aren't a creditor of the company in question.
Now, whether you buy any of that is another question, as is whether you think the benefit outweighs the cost or the risk, but there's at least a good-faith argument to be made that it's not just a casino built on playing with other people's money.
posted by jedicus at 11:55 AM on April 22, 2010 [6 favorites]
Money doesn't work. And for whom is that a service?
People who want to buy a home, or start a business, or buy a toaster, or send their kids to college, or send themselves to college, or develop a new product, or make payroll, or have a surgery, or buy a car, etc, etc, etc.
posted by Copronymus at 11:56 AM on April 22, 2010 [3 favorites]
People who want to buy a home, or start a business, or buy a toaster, or send their kids to college, or send themselves to college, or develop a new product, or make payroll, or have a surgery, or buy a car, etc, etc, etc.
posted by Copronymus at 11:56 AM on April 22, 2010 [3 favorites]
Are you going to feed your family with family?
Worked for the Donner party... well maybe not.
posted by FatherDagon at 12:02 PM on April 22, 2010 [2 favorites]
Worked for the Donner party... well maybe not.
posted by FatherDagon at 12:02 PM on April 22, 2010 [2 favorites]
Don't Wall Street and other investors provide the service of putting fallow money to work?
Money doesn't work. And for whom is that a service?
In theory, financial services are actual services. In the same way that currency was established to make barter more efficient, in turn, lending and electronic transfers make financial transactions more efficient.
There are also people who end up with more money than they strictly need. They can either make more money by way of running a business or renting, etc. or alternately, lend that money to someone who will make more money by way of creating a business from that business loan. No, the money itself doesn't do the "work," but when money flows freely, transactions happen faster and businesses can operate more smoothly. Everybody gets a little bit more, because they make a little bit more, knowing that they'll be able to sell a little bit more.
In practice, financial services have gotten tangled in a web of corruption, lies, and oneupsmanship in which people offer outrageous returns on capital because everyone else is doing it. Still, we shouldn't assume that the worst of the practice should damn the theory as a whole.
Generally speaking, I am appalled at the way people scam and bilk people by way of technicalities. Why is it OK to rob people of money, essentially stealing hours or years of their life simply because they signed something? You can't stab someone in the kidney no matter what they sign, but you can do the financial equivalent. It's like the damned Wild West, and people still think government regulation is a bad idea?
posted by explosion at 12:07 PM on April 22, 2010 [4 favorites]
Money doesn't work. And for whom is that a service?
In theory, financial services are actual services. In the same way that currency was established to make barter more efficient, in turn, lending and electronic transfers make financial transactions more efficient.
There are also people who end up with more money than they strictly need. They can either make more money by way of running a business or renting, etc. or alternately, lend that money to someone who will make more money by way of creating a business from that business loan. No, the money itself doesn't do the "work," but when money flows freely, transactions happen faster and businesses can operate more smoothly. Everybody gets a little bit more, because they make a little bit more, knowing that they'll be able to sell a little bit more.
In practice, financial services have gotten tangled in a web of corruption, lies, and oneupsmanship in which people offer outrageous returns on capital because everyone else is doing it. Still, we shouldn't assume that the worst of the practice should damn the theory as a whole.
Generally speaking, I am appalled at the way people scam and bilk people by way of technicalities. Why is it OK to rob people of money, essentially stealing hours or years of their life simply because they signed something? You can't stab someone in the kidney no matter what they sign, but you can do the financial equivalent. It's like the damned Wild West, and people still think government regulation is a bad idea?
posted by explosion at 12:07 PM on April 22, 2010 [4 favorites]
How about separating the functions of investment and commercial banking? Some of the liquidity crisis of 2008 was caused by banks becoming insolvent when the merry-go-round of real estate prices finally broke down. If commercial banking and investment banking had been separated, it might not have happened.
From my limited perspective, the summary of the legislation looks like it wants to regulate the new monsters that have been created by the repeal of the Glass-Steagall act of 1933, rather than killing them.
The Volcker rule wants to re-separate the investment and commercial banking functions, but it's like closing the gate after the horses have left. The proposed legislation appears to leave the gate open in hopes that the horses return.
The banks will fight the Volcker rule vigorously, and judging from the influence the industry had during the liquidity crisis, I will be very surprised if the rule is anywhere present in the final legislation.
posted by the Real Dan at 12:19 PM on April 22, 2010
From my limited perspective, the summary of the legislation looks like it wants to regulate the new monsters that have been created by the repeal of the Glass-Steagall act of 1933, rather than killing them.
The Volcker rule wants to re-separate the investment and commercial banking functions, but it's like closing the gate after the horses have left. The proposed legislation appears to leave the gate open in hopes that the horses return.
The banks will fight the Volcker rule vigorously, and judging from the influence the industry had during the liquidity crisis, I will be very surprised if the rule is anywhere present in the final legislation.
posted by the Real Dan at 12:19 PM on April 22, 2010
Oh hey I was totally at that speech today.
A Goldman Sach's guy left the speech mid-way through.
posted by The Whelk at 12:23 PM on April 22, 2010 [1 favorite]
A Goldman Sach's guy left the speech mid-way through.
posted by The Whelk at 12:23 PM on April 22, 2010 [1 favorite]
I didn't think I was getting deep when saying investors put money to work. I didn't do so well in macroeconomics, but allow me to wear the professor pants. Investors (generally) lend money to people who could use money to earn more money, but don't have the capital on hand to do it. Thus, the invested money "works" in that it helps with transactions, like mortgages (for people to buy property, and then pay it back with interest), loans (which give money to people about to do something like start a business, and then pay it back with interest), and commodities trading (which buys stuff from people who want to sell, and sells stuff to people who want to buy, pocketing the difference).
Granted, it pains me as a commie Democrat voter to say all of this stuff, so let me just say those are ideal conditions and that it tends to screw up in time as investors think they've reinvented the wheel by doing supersmart churny stuff to the market that creates no actual wealth. So, uh, let's bring back the Glass-Stegal Act so that banks don't try the voodoo and people's long term money is safe, and let people who want to gamble on the weird stuff go to investment firms, that don't get labeled as banks and honestly admit that you're playing with probability. Although this probably also calls for reform of the places that do the ratings, since they get paid by the banks and investment firms. As a liebrul, I'd call for a government entity paid by taxpayers as a whole to do that job, but I'm guessing that's too much socialism to happen in this decade.
TL;DR: We should all go back to bartering.
posted by mccarty.tim at 12:30 PM on April 22, 2010
Granted, it pains me as a commie Democrat voter to say all of this stuff, so let me just say those are ideal conditions and that it tends to screw up in time as investors think they've reinvented the wheel by doing supersmart churny stuff to the market that creates no actual wealth. So, uh, let's bring back the Glass-Stegal Act so that banks don't try the voodoo and people's long term money is safe, and let people who want to gamble on the weird stuff go to investment firms, that don't get labeled as banks and honestly admit that you're playing with probability. Although this probably also calls for reform of the places that do the ratings, since they get paid by the banks and investment firms. As a liebrul, I'd call for a government entity paid by taxpayers as a whole to do that job, but I'm guessing that's too much socialism to happen in this decade.
TL;DR: We should all go back to bartering.
posted by mccarty.tim at 12:30 PM on April 22, 2010
Man, it's so annoying that the people with all the money get all the political influence, meaning the banks get to pick and choose the rules applied to them. Did the Founding Fathers intend for this to be a Representative Plutocracy?
posted by mccarty.tim at 12:34 PM on April 22, 2010 [2 favorites]
posted by mccarty.tim at 12:34 PM on April 22, 2010 [2 favorites]
Republicans Block Start of Debate on Financial Bill
posted by HP LaserJet P10006 at 12:37 PM on April 22, 2010
posted by HP LaserJet P10006 at 12:37 PM on April 22, 2010
Did the Founding Fathers intend for this to be a Representative Plutocracy?
Seems I remember something about how you had to be a white, land-owning male to vote in the early days of the USA.
posted by anti social order at 12:56 PM on April 22, 2010 [1 favorite]
Seems I remember something about how you had to be a white, land-owning male to vote in the early days of the USA.
posted by anti social order at 12:56 PM on April 22, 2010 [1 favorite]
Oh right. Yeah, a lot of them were kind of slaveowning misogynists, now that I think about it.
Sorry, I was just trying to use the new style of politics where you do like Glenn Beck and act like the Founders were these oracles you needed to consult at Delphi before you reform anything. Which is of course, bunk, as they were very human, and thus pretty fallible. Plus, they argued on everything (so which one do you trust?), and modern politics wasn't around in their time.
posted by mccarty.tim at 1:08 PM on April 22, 2010 [1 favorite]
Sorry, I was just trying to use the new style of politics where you do like Glenn Beck and act like the Founders were these oracles you needed to consult at Delphi before you reform anything. Which is of course, bunk, as they were very human, and thus pretty fallible. Plus, they argued on everything (so which one do you trust?), and modern politics wasn't around in their time.
posted by mccarty.tim at 1:08 PM on April 22, 2010 [1 favorite]
Yeah, I always wondered why I'm supposed to care what the founding fathers would have thought about insert modern issue. Sure, they came up with a pretty good document to guide governing, good job guys, but beyond that why try to puzzle out intent? Surely there was not unanimous agreement on all points of the original document anyway. It's just a convenient appeal to authority for demagogues.
posted by ghharr at 1:20 PM on April 22, 2010
posted by ghharr at 1:20 PM on April 22, 2010
I'm reminded of the episode where Hank Hill finds the mold inspector, the insurance adjuster, and the general contractor eating lunch together.
posted by RobotVoodooPower at 1:21 PM on April 22, 2010 [7 favorites]
posted by RobotVoodooPower at 1:21 PM on April 22, 2010 [7 favorites]
Did the Founding Fathers intend for this to be a Representative Plutocracy?
Most certainly. The leaders of the revolution were the gentry aristocracy, for god's sake.
posted by absalom at 2:35 PM on April 22, 2010
Most certainly. The leaders of the revolution were the gentry aristocracy, for god's sake.
posted by absalom at 2:35 PM on April 22, 2010
We already wrote a financial reform bill that worked great. It was called the Glass-Steagal Act.
This shit isn't rocket science; right now we are just struggling with wanting to have our cake and eat it too. (The cornerstone of financial services!)
posted by mek at 3:11 PM on April 22, 2010 [2 favorites]
This shit isn't rocket science; right now we are just struggling with wanting to have our cake and eat it too. (The cornerstone of financial services!)
posted by mek at 3:11 PM on April 22, 2010 [2 favorites]
It seems like the major problem is the ratings agency. I'm not even sure why we have ratings agencies? It seems like a redundant function in a market.
Don't Wall Street and other investors provide the service of putting fallow money to work?
DU: Money doesn't work. And for whom is that a service?
I think tight credit generally dis-empowers anyone who doesn't hold the majority of assets in our society (unless you replace the entire credit market with a byzantine and even more game-able system of regulations designed to protect the have-nots from exploitation by the haves).
Weren't there some French economics researchers who applied math used in hydrodynamics to build a model for how increasing transaction costs drive wealth disparity? Essentially, I believe the net benefits of a relatively transparent well regulated market outweigh the disadvantages. The problem is that we had a breakdown in transparency and regulation.
posted by BrotherCaine at 3:57 PM on April 22, 2010
Don't Wall Street and other investors provide the service of putting fallow money to work?
DU: Money doesn't work. And for whom is that a service?
I think tight credit generally dis-empowers anyone who doesn't hold the majority of assets in our society (unless you replace the entire credit market with a byzantine and even more game-able system of regulations designed to protect the have-nots from exploitation by the haves).
Weren't there some French economics researchers who applied math used in hydrodynamics to build a model for how increasing transaction costs drive wealth disparity? Essentially, I believe the net benefits of a relatively transparent well regulated market outweigh the disadvantages. The problem is that we had a breakdown in transparency and regulation.
posted by BrotherCaine at 3:57 PM on April 22, 2010
How about "you have to produce something of value in order to make money from it"?
ALERT the teabaggers. There is a communist in our midst!
posted by notreally at 3:58 PM on April 22, 2010
mek wrote: "We already wrote a financial reform bill that worked great. It was called the Glass-Steagal Act."
To be fair, a large part of the problem was also caused by "banks" that aren't really banks.
That and naked CDS.
posted by wierdo at 4:46 PM on April 22, 2010
To be fair, a large part of the problem was also caused by "banks" that aren't really banks.
That and naked CDS.
posted by wierdo at 4:46 PM on April 22, 2010
Happy Earth Day - NYPD trashes hundreds of bikes for Obama visit.
posted by homunculus at 11:06 PM on April 22, 2010
posted by homunculus at 11:06 PM on April 22, 2010
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