Not the Change We Need: Part VIII in a Continuing Series

Robert Reich has some good thoughts on the Obama administration’s financial regulation plan:

The plan doesn’t stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn’t require bankers to take their pay in long-term stock options or warrants, and it doesn’t even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.


In short: It’s a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 — which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 — will repeat itself within a decade, if not sooner.

This is not the change we need. It is increasingly clear that Barack Obama has little desire to be a Roosevelt, either trust-busting Teddy or regulating Franklin. There seems to be no good reason for taking such a soft touch with the financial industry, though it is enough to make me wonder whether the President’s caution may in fact be timidity. Financial regulation may not have even been on the President’s radar when he launched his campaign, but it is now one of the most important issues facing him. And this plan is not sufficient. I acknowledge that he may wish to focus on health care instead (after all, this is why torture investigations cannot proceed, why don’t-ask-don’t-tell is still policy, and why climate change legislation is being ignored), but the economic benefit of a real health care reform plan could be easily consumed in another financial meltdown 10-20 years from now. This is not the change we need.

On the same subject, we have Paul Krugman, questioning those to champion breaking up the banks.

I’m a big advocate of much strengthened financial regulation. One argument I don’t buy, however, is that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it’s just not possible.

The point is that finance is deeply interconnected, so that even a moderately large player can take down the system if it implodes. Remember, it was Lehman — not Citi or B of A — that brought the world to the brink.

The interesting thing there, is that Krugman seems to assume that the impetus behind antitrust action against too-big-to-fail banks is the belief that if we had smaller banks, we wouldn’t need to regulate them as strongly. I disagree. I am less concerned about too-big-to-fail (a measure which, if it has any meaning, must be a measure of importance not size) than too-big-to-regulate. I have no real knowledge here, but I once witnessed the considerable work that would be needed to pursue even a fairly small alter ego claim. My instinct is that attempting to understand, let alone regulate, a multinational behemoth is a correspondingly Augean task.

Do the regulatory benefits of breaking up the banks, then, outweigh whatever benefits are obtained consolidation? I have no idea. But, this is question to ask, and it does not seem to be the one Krugman is answering.


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