Four things you need to know about FinReg to keep up in conversation

Let’s be honest: nobody I know who follows politics is super excited to learn about financial reform.  Following the health care debate was tedious at times, but the bills weren’t super hard to understand and the progressive goal — a robust public option — was clear.  Now with this goddamn FinReg nonsense no one knows what the hell is going on.  Paul Krugman is saying banks that are to big to fail (TBTF, if you want to get all fancy) aren’t the main problem; Simon Johnson is saying they’re a huge problem, if not the greatest.  Here are a few things you should know so you don’t find yourself in the position of saying, “Oh yeah, the Volcker Rule.  Isn’t that when, the people, er, the new committee — LOOK OUT THERE’S A GIANT BEAR BEHIND YOU.”  And then you jump through a window to escape to bloody, bloody safety.

Here are four terms you’ll need to know to escape that embarrassment.

The Volcker Rule: It’s as good a place to start as any.  Named after former Fed chairman Paul Volcker, the Volcker rule would prohibit a federally-backed bank from making speculative investments with its own capital.  So, if the Fed’s on the hook for your tab, you can’t go gamble everything on red and expect the government to cover your bet if it goes sour.

If you’re thinking to yourself: Well, that makes sense and isn’t very radical — you’re right.  But we’re talking about the US Congress here, and the idea that tax-payers shouldn’t subsidize Wall Street is literally the most progressive proposal on Capitol Hill right now.  As of a few days ago, Volcker was optimistic his rule would be included in final legislation. 

Too Big Too Fail: Everyone knows what TBTF means by now, but we keep hearing that phrase get thrown around.  Bernie Sanders introduced legislation last year ago arguing banks that are too big to fail are too big to exist.  It makes sense on an intuitive level — get rid of institutions that need to be bailed out and you’ll get rid of the need for bailouts.  Krugman has argued that this idea is missing the point, though.  A massive run on smaller banks can be just as damaging to the economy as runs on larger banks (see: The Great Depression). 

Without proper regulation of large and small institutions, bailouts will happen, he writes, and politicians who pretend they’ll let institutions fail are being disingenuous:

[T]he Republican strategy for beating back effective regulation: just claim that what we’re really doing is telling big banks, sternly, that there will be no more bailouts — they’re not too big to fail.

And then, when the next financial crisis arrives — well, it will play just like 2008. President Palin or whoever will find themselves staring into the abyss — and conclude that they have to bail out the financial sector anyway.

In a crisis, the financial system will be bailed out. That’s just a fact of life.

Simon Johnson and James Kwak, the authors of the new book 13 Bankers, make a similar sounding argument, though they are more critical of the TBTF oligarchy:

Unless these too-big-to-fail banks are broken up, they will trigger a second meltdown, the authors write.

“And when that crisis comes,” they say, “the government will face the same choice it faced in 2008: to bail out a banking system that has grown even larger and more concentrated, or to let it collapse and risk an economic disaster.”

The key takeaway here is that although the TBTF institutions pose a great risk, without strict regulations breaking them up won’t be enough.  Do the current regulations go far enough?  Simon Johnson thinks not:

Our biggest banks are out of control and will not be reined in by the measures currently on the table. 


Consumer Protection Agency: The CPA is basically the public option of FinReg, to employ a crude analogy.  Liberals wanted to create an independent agency to oversee the financial sector to protect consumers from dangerous products, the same as we do in the real economy.  Elizabeth Warrens writes:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner.

Dodd’s Senate bill creates CPA but as part of the Federal Reserve, not as an independent agency, which will weaken its regulatory power.  If this discussion is starting to feel like talking about the public option, well, you’re not alone.  Salon’s Andrew Leonard, after reluctantly endorsing the Obama administrations attempts at FinReg, laments:

The fight — and this appears to be an emerging narrative of the entire Obama administration — is to keep imperfect legislation from being further watered down, rather than striving to improve it.

If anyone can think of a better summary of the Democratic party right now I’m all ears.  This post is starting to get a bit long, so we’ll have one more term and then see what wacky comedies of errors Michael Steele is engaged in for an afternoon post. 

Move Your Money: To use another crude analogy, this is the “Shop Locally” of FinReg.  The MYM folks are encouraging people to take their money out of the giant mega-banks and put it in local shops.  If you’re looking for a narrative to convince you to do this, think It’s A Wonderful Life.  For more information, and for ways to find community credit unions, check out the Move Your Money website here.

I’ll try to keep following FinReg as updates happen, but I’m new to a lot of this stuff too.  Any bankers out there who want to tip me off to some juicy tips, or help clarify anything I wrote, hit me up in comments or at my e-mail address on the sidebar.      

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7 Responses to Four things you need to know about FinReg to keep up in conversation

  1. Pingback: Move Your Money » Blog Archive » A Primer On Financial Regulatory Reform

  2. humphreylee says:

    I think Too Big To Fail is not necessarily a problem in their own right, despite how much power these institutions wield in their own right, but it’s more the “These are Too Big To Fail and we won’t let them” BS. If you do bad business, and take risky loans, and engage in activities like Naked Short Selling or dangerous derivatives endeavors, and they all bit you in the ass, I don’t care how big you are, you deserve to go down. The problem is, even though there have been bailouts before, there still seems to be absolutely no plan in place for if/when this happens again. No one has been willing to say in the open air, if you epic fail you WILL BE dissolved and your assets WILL BE divvied up amongst institutions that are known for their responsible actions. But, when most of the Treasury department is filled with Too Big To Fail alums, why should we expect anyone to say these things. Except Elizabeth Warren. She’s neat that way…

  3. jake brodsky says:

    Many who ponder high finance tend to focus on the symptoms, not the problem itself.

    The problem with banks is not the size. The problem is a structural issue on Wall Street. Too many people became enamored with financial tools they did not fully understand. Like many tools, these things have macro-economic implications that eluded even the experts.

    Wall street got burned; and thus, so did Main Street.

    Would better regulation have helped? Only if the regulators themselves understood better what the problem was. I’m sorry, there are too many pretenders on Wall Street, busy selling derivatives of that which they do not fully understand. And there are too many pretenders in Congress who vote on bills they have never even had a chance to review.

    How can anyone expect solutions from social morasses like these?

    • John Knefel says:

      You bring up a good point. “Better regulation” only works if A) the regulators actually regulate, and B) they understand what needs to be done.

      That’s why I like Volcker’s suggestions that there be hard and fast rules for regulation that are implemented automatically. The quote below is from a NY Times article called “Heading Off The Next Crisis,” and is a rough summary of Volcker’s views:

      “One way to deal with regulator fallibility is to implement clear, sweeping rules that limit people’s ability to persuade themselves that the next bubble is different — upfront capital requirements, for example, that banks cannot alter. Thus far, the White House, the Fed and Congress have mostly steered clear of such rules””

      But that last sentence really tells you most of what you need to know about FinReg.

  4. thatguy says:

    MYM! The truly perverse part of the bailouts is that these megabanks were kept alive with taxpayer money so that they could then recapitalize themselves by charging usurious credit card & loan rates and banking fees (overdraft, ATM etc) to the very taxpayers that bailed them out. If you bank with them, they will try to suck you dry every way they can, because they need the money (to pay themselves bonuses).
    Please Move Your Money. Do not manacle yourselves (and the rest of us) to debt slavery.

  5. jcalton says:

    Can we make the 0th thing we need to know about “FinReg” is what is FinReg, and what does it stand for?

  6. davidangelo says:

    “finreg” – I like that.

    FinReg is a total waste of time. Guess what? Adding regulations only HELPS big banks. It eliminated the ability to compete with them because the cost of compliance is too high for smaller institutions. And guess what else? You may THINK its a good idea to make ‘banks’ pay for their malinvestment – but banks don’t pay. Citibank isn’t a person with a personal bank account. You charge them anything and they just transfer that cost back to the customer (AKA you, stupid).

    Also, I find it laughable that people DESPISE banks. ATM fees are evil? Here’s an idea: do what people did for literally thousands of years – don’t use ATMs. They have every right to charge for that service. Banks aren’t public utilities, they are businesses, for christ’s sake!

    Washington feels they compelled to act because Americans are acting like spoiled children and making demands. But this direction doesn’t help anything.

    Also, forget the Volcker Rule. Instead, consider the Angelo Rule: Establish a precondition for FDIC membership that no commercial bank can have an investment arm and accounts will only be covered up to 75% of the balance. Make people take responsibility.

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