Robert Reich on Banking Regulations

By John Ballard

Reich on the proposed banking bill.

The Dodd bill strengthens the biggest Wall Street banks relative to smaller banks, and sets them up to become even bigger. As long as the Fed can open its discount window only to the biggest Wall Street banks, their borrowing costs inevitably will be lower than those of smaller firms because their debt will be safer. (This, incidentally, is also a problem posed by the liquidation fund.) So at a time when we ought to be ought to be trimming the sails of the giants on Wall Street, the Dodd bill puts more wind in them.

This is what he says is missing from the proposed regulations....

1. 
   Require that trading of all derivatives be done on open exchanges where parties have to disclose what they�re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called �unique� derivatives opens up a loophole big enough for bankers to drive their Ferrari�s through.


2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn�t go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.


3. Cap the size of big banks at $100 billion in assets. The current bill doesn�t limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit.
   

Wall Street doesn�t want these three major reforms because they�d cut deeply into profits, and it�s using its formidable lobbying clout with both parties to prevent these reforms from even from surfacing. It�s time for Main Street � Tea Partiers, Coffee partiers, and beer drinkers � to be heard.

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I can't resist saying something about his headline, A Short Citizen�s Guide to Reforming Wall Street.
Only somebody as tall as Reich can refer to "short citizen" and get away with it. 

But seriously, I have been thinking about something I haven't seen mentioned in the debate about big businesses, bailouts and the now popular TBTF epithet: SOE's.

State-owned enterprises (also called government-owned corporations or GOC's) are frequently mentioned in passing by financial analysts writing about economic matters in China and India, but most of the world outside the United States of Tea Parties is readily aware that most of the world's governments routinely operate as citizen-participants in any economic enterprise benefiting their respective homelands, whether it be manufacturing exports to the rest of the world, oil production subsidizing everything from gasoline to bread, or actual banking enterprises. Check out this list from China. 

America has a short list of government-owned corporations including Amtrack, TVA, Pension Benefits Guaranty Corporation, The US Postal Service, FDIC and others. But these clearly essential components of our economy, along with our own GSE's ("government sponsored enterprises" which are different, you know) -- think Fannie Mae and Freddie Mac -- are either taken for granted or regarded as whipping boys by many in a misguided attempt to promote "free enterprise" and "limit government intrusion" in the marketplace. How often have we heard how "government can't do anything right"? It's perhaps the most commonplace of all ignorant remarks going unchallenged.

The day has passed when Randian capitalism might work. (I question whether or not it ever could, but that is an academic argument not worth the energy to advance.) Whether the subject be cars, publishing, technology or banking I cannot think of any domestic companies not in competition with the rest of the world, which includes competition from government-owned or state-owned enterprises.

I am not persuaded that bigness is by it's very nature all that bad. In fact, I can see where banks doing business in a market including the rest of the world are not really all that big. Take a look at this list of the world's fifty largest banks ranked by assets and see where those from USA are listed. Citigroup and Bank of America make the top ten, but  there are only three others among the next forty. 

Where this puts me politically I'm not sure, but a lifetime in business gave me a healthy respect for the marketplace. I think Reich gets it about right when he refers to "Tea Partiers, Coffee partiers and beer drinkers" alike calling for transparency. We have a measure of transparency already, to be sure, but like lists of ingredients on factory-made foods or the fat prospectus of a mutual fund, that so-called "transparency" is no substitute for teams of old-fashioned auditors following the tedious details of their dismal craft, overseen by serious bosses charged not to fall asleep at the switch... again.