Regulators have delayed the imposition of the Volcker Rule for two years, and this article presents a plausible explanation of why you should not be outraged.
Furthermore, the article links to a letter (PDF) by Robert Johnson and Joseph Stiglitz -- and if you have to choose three economists to trust in this crazy world, Stiglitz should probably be among them -- as saying that simple reimposition of Glass-Steagall would be a mistake if it worked. The writer argues that beyond that, it wouldn't work, because banks had already found a way around Glass-Steagall prior to its elimination.
Calling all economics writers here on Daily Kos -- help me/us understand whether this is true. If it is true, what are the implications?
That this was written for TIME Magazine's "Swampland" is not an sign that one can dismiss it out of hand. Yes, it's a very mainstream/centrist publication and yes it does employ Joe Klein, but the writer, Massimo Calabresi, produces some pretty good stuff and is not someone whom I'd dismiss out of hand. If it can be dismissed, on the other hand, then it should be! This is one of the time when I'm more interested in asking questions than in answering them.
Here are some of the critical portions of the article to consider:
True, a simple idea [like the Volcker Rule] has been rendered impossibly complex as it moved from the mouth of former Fed chief Paul Volcker’s through the brains of regulators at the Office of the Comptroller of the Currency (OCC) and into hundreds of pages of vaguely worded rules. Originally, you will remember, the idea was a return to the 1938 Glass-Steagall bright-line distinction between banks that make money through lending (commercial banking) and banks that make money through investing (investment banking).And then there's this:
But contrary to popular opinion, the Glass-Steagall Act was rescinded not because it maintained that bright-line distinction, but because it had completely failed to do so. While some traditional banks had stayed on the “commercial” side of the Glass-Steagall line, a shadow banking system based on money market deposits and equal to or greater than the traditional one had grown up outside the Glass-Steagall restrictions explicitly to avoid them. Ultimately it was this shadow banking system’s collapse, not the commercial banks failure, that caused the 2008 crisis. Only the government’s emergency and ad hoc extension of its guarantee of deposits over the money markets in the fall of 2008 prevented a global economic catastrophe.
Unfortunately, this “market making” role [of promoting efficient movement of capital through the financial system] for banks is distinguishable from trading for profit (“proprietary trading”) only by the intention of the banker doing the trading, regulators and the authors of Dodd-Frank concluded. How to judge intentions that may exist only in the opaque minds of Wall Street traders? Unlike Wittgenstein, regulators do not believe that “whereof one cannot speak, thereof one must remain silent.” Coming up with workable language to regulate trader intention is one of the primary reasons for the delay in implementing the Volcker Rule.I've held the popular opinion that Glass-Steagall was repealed to releash the Kraken of investment banks rather than just because it wouldn't work, and one article -- without a lot more -- is not going to change that opinion. Nevertheless, I want to be intellectually honest and open to evidence. Similarly, I'm one of those who has thought that "should Glass-Steagall be reinstated?" is an easy question to answer -- "yes, duh!" -- and if the criticisms above are well-placed, I want to know. And, finally, even though this hasn't gotten a lot of oxygen in the past 24 hours, this delay of the Volcker Rule is the sort of thing about which I would expect to read all sorts of richly profane denunciations in the months ahead -- and if it's not quite so simple then I want to get ahead of the game and start to understand it.
But just because it’s hard doesn’t mean it can’t work: even the vague preliminary Dodd-Frank moves to regulate risky trading by banks are causing some to close their proprietary trading operations. What the two-years delay really buys is time for the newly-appointed head of the OCC, Thomas Curry, who comes from the consumer-friendly FDIC, to show whether he can do better than his predecessors at crafting regulation to limit risk taking by the big banks.
A regular Swampland commenter named Stuart Zechmann was the first (and almost only) substantive commenter on the piece; I'm presuming that, as criticism of the article, his comment can be reproduced in whole, but if the editors want to redact it, they should go ahead. (In any event, it's at the link.) He says:
You write:If Zechmann (who, by the way, to my knowledge I don't know) is right, then this story is not really about "are the reforms that you and I think that we want really quite so appropriate?", but "who is feeding bullcrap to Calabresi, for what specific purpose, why is TIME tolerating it, and what do we do about it?"
"contrary to popular opinion, the Glass-Steagall Act was rescinded not because it maintained that bright-line distinction, but because it had completely failed to do so"
Apart from the factual errors ("1938 Glass-Steagall", the Act was enacted in 1933) present in your piece, what evidence do you have that the authors of Gramm-Leach-Bliley --Phil Gramm, for example-- were primarily concerned with regulating financial markets more forcefully than Glass-Steagall's "bright-line" was adequate to provide?
Also, when you describe your view --that Glass-Steagall was rescinded because it didn't do enough to proscribe harmful banking activity-- as "contrary to popular opinion," do you mean to say that your view is contrary to Joseph Stiglitz's opinion, as reported by ABC News four years ago?
"Economic experts say that Gramm and others are to blame for the current crisis that is shaking Wall Street.
Gramm's successful effort to pass banking reform laws in 1999, which reduced decades-old regulations separating banking, insurance and brokerage activities, helped to create the current economic crisis.
"As a result, the culture of investment banks was conveyed to commercial banks and everyone got involved in the high-risk gambling mentality. That mentality was core to the problem that we're facing now," Stiglitz says.
Lakshman Achuthan, managing director of the Economic Cycle Research Institute, also asserted that Gramm was mistaken, criticizing him and economic policymakers for not taking the risk of recession seriously enough.
"There is a recession -- that is clear and it doesn't make sense to blame middle-class folks," says Achuthan. "Policy holders should be held fully accountable for letting Wall Street run amok."
Achuthan agrees that Gramm's banking reform laws helped lead to the subprime mortgage crisis as commercial banks started taking enormous risks.
"We were setting up this bonfire years ago -- the deregulation, the inordinate amount of liquidity given to the system all set the stage for the bubble and the bust," he explains. "
In case you're unfamiliar with Lakshman Achuthan, Massimo Calabresi, he's
Chief Operations Officer
Co-Founder & Chief Operations Officer of ECRI, Achuthan is the managing editor of ECRI's forecasting publications. He is also a member of Time magazine's board of economists and the Levy Institute's Board of Governors, and serves as a trustee on the boards of several foundations."
And when you claim "Ultimately it was this shadow banking system’s collapse, not the commercial banks failure, that caused the 2008 crisis," aren't you obscuring the fact that investment banks themselves, as inextricably woven as they are into the financial fabric of money-center banks (JPMorgan-Chase, Wells-Fargo, BoA, Citi, etc), were conducting great volumes of risk-laden business with the unregulated SBS? Isn't that the whole point?
Didn't Barack Obama say as much, during 2008?
"President Barack Obama argued on the campaign trail that one bill -- the Gramm-Leach-Bliley Act of 1999 -- led to deregulation that helped cause the crisis. Among other things, that law allowed for the creation of giant financial supermarkets that could own investment banks, commercial banks and insurance firms, something banned since the Great Depression. Its passage, critics say, cleared the way for companies that were too big and intertwined to fail.
The law also had limits. It cemented the Federal Reserve as the top regulator for giant firms such as Citigroup Inc. and Bank of America Corp. But it didn't give any regulator sweeping powers over investment banks such as Bear Stearns Cos. and Lehman Brothers, or standalone insurance giants like American International Group Inc."
What explains the discrepancy between "a member of Time magazine's board of economists," award-winning economists such as Joeseph Stiglitz, "popular opinion," Barack Obama circa 2008, and your view of the role of Glass-Steagall repeal in the economic meltdown, Massimo Calabresi?
More importantly, what explains the inclusion in a TIME piece of your unsupported assertions as statements of undisputed fact? Do you just not know a great deal about the topic, and are merely repeating things you've recently heard?
I don't know which view is correct; I don't have a lot much more to add than that. My hope (and bet) is that some of you will.