Hearing on Too Big to Fail Bill

The House Financial Services Committee held a hearing, Systemic Regulation, Prudential Matters, Resolution Authority and Securitization last Thursday.

What was rare is almost all of the experts said basically the same thing, the too big to fail bill is TARP on Steroids, a disaster, making TARP permanent de facto.

Congressman Brad Sherman sums it up:

 

Richard L. Trumka, AFL-CIO President came out swinging on the Federal Reserve. Trumka called for reform of the Federal Reserve governance, and notes:

Even more alarmingly, the discussion draft would appear to give power to the Federal Reserve to preempt a wide range of rules regulating the capital markets—power which could be used to gut investor and consumer protections.

On use of more taxpayer funds:

We are also deeply troubled by provisions in the discussion draft that would allow the Federal Reserve to use taxpayer funds to rescue failing banks, and then bill other nonfailing banks for the costs. The incentive structure created by this system seems likely to increase systemic risk.

and suggests a Progressive fee structure to discourage banks from becoming so large.

Finally the AFL-CIO also notes TARP on Steroids:

In these respects, the discussion draft appears to take the most problematic and unpopular aspects of the TARP and makes them the model for permanent legislation.

Interesting fact on Leverage from AFR’s Jane D’Arista:

The rise in financial sector debt from 63.8 percent to 113.8 percent of GDP over the decade from 1997 to 2007 is a telling indicator of how leverage bloated the system.

AEI's Wallison also makes no bones on this bill:

Rather than ending too big to fail, the Draft makes it national policy. By designating certain companies for special prudential regulation, the Draft would signal to the markets that these companies are too big to fail, creating Fannies and Freddies in every sector of the economy where they are designated. This will impair competition by giving large companies funding and other advantages over small ones.

Dean Baker has some research on the value of a too big to fail subsidy in this CEPR report.

The increase in the gap of 0.49 percentage points implies a government subsidy of $34.1 billion a year to the 18 bank holding companies with more than $100 billion in assets in the first quarter of 2009.

Supposedly after so much testimony and criticism, Barney Frank says they will change the bill. But it's been over a year, and as noted the bill was a rehashed version of giving the Fed more powers from a previous proposal that was also blasted by various experts.

Baseline Scenario also has a good critique of what is wrong with the too big to fail bill

The decision that there be “no public list of identified companies,” as the bill currently reads, stems from a belief that secrecy about the identity of these firms will limit moral hazard. However, after more than a year of costly bailouts, the federal government’s implicit guarantee of major financial firms is, sadly, rock solid. To try to make it magically disappear by refusing to name the most systemically dangerous firms not only won’t work, but will severely jeopardize the effectiveness of the regulation itself.

(read TARP on Steroids once again)

Here is the entire transcript and video of this hearing.

Comments

thanks for links

Thank you for the link to the hearing video and transcript.
I tuned in late and missed especially Trumka's statement.
This is a great blog!

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“Times are ah chang’n”

Republicans drive the Republican candidate out of the New York-23 race. And, a Democrat House member grills the Democrat Treasury Sec. to the point of make the Sec. sound ridiculous about a Dem. Administration economics bill. At the bottom of the YouTube screen provided by Rober Oak, are other video options. See the one call “Brad Sherman questions Sec. Geithner.”

What happened to party loyalties? Are profound economic changes such as we have seen in the past year giving way to profound political changes? There is a lot of talk about a “New Economy.” I wonder if we are going to see a “New Politics” also.

One thing is for sure: The past is no long a guide to the future – in Economics and Politics. For students of political economy such as myself, ‘it don’t get better than this’.

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to me political parties

are funding points where corporate lobbyists go to make sure their agenda gets through. ;)

I mean it's empty labels to me. What do I care for Democrats in power when the bills they pass are just as bad as when Republicans were in power?

I wish a 3rd party candidate, just generally could break through. the only one who has been successful is Bernie Sanders and we could use a lot more...if 3rd party candidates can win, it would break this corporate stranglehold that is both Dems and Republicans.

It's really strange too. Believe this or not, Chuck Grassley is one of the best friends to Professional Tech labor...we have Shelby also better on financial reform than a lot of Dems...
go figure.

One of the things that drives me nuts are these gerrymandered seats, esp. in Congress. Ex. Mike Pence. You cannot get him out of Congress even though his votes, positions have ravaged his district. It's a strong manufacturing area and they have been decimated by outsourcing and other corporate driven policies..
yet, Pence just has to say some absurd thing on "anti-choice" and bam, he wins again.

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Economic Crisis <=> Political Crisis.

You are absolutely right RO, there is no difference between the political parties and the corporations have finally succeeded in making it so.

To this end, just consider Ilargi's recent observations on the matter.

Allowing investment banks and securities firms access to taxpayer deposits, ref: the 1999 Glass-Steagall repeal (Gramm-Leach-Bliley Act), and liberating the derivatives trade, ref: the 2000 Commodity Futures Modernization Act, are the two pieces of law that directly led to a situation in which banks were allowed both to 1) become as big as they are now (too big to fail) and 2) to leverage their bets as much as they have (which wiped out their capital).

And you don't really have to be all that smart to realize that both acts are de-regulatory, and made the markets more, not less, free. Now look around you and tell me what you see 10 years later. Not what the likes of Shedlock and Ron Paul envisioned, I’ll bet.

In other words, the free market system has failed America miserably. Well, at least in this instance, and that by itself should raise very grave doubts about that system.

And it's not all that hard either to see why that is. If you let market participants free to pursue what is in their best interests, without forcing them to give priority to society's best interests, they will eventually figure out that the best single investment they can possibly make is to buy the government. That allows them to make the laws. Which is detrimental to the rest of society, and leads to the sort of mess we're in right now, which even libertarians concede is not desirable.

He's right, ya know, the free market gives corporations a huge advantage over individual citizens. And they have used that advantage to support politicians who are pliable and getting voters to go against their best interests in getting those same politicians elected. Correcting the situation requires nothing short of a revolution.

Capitalism might or might not work only if and when you could keep corporations out of the government. If you can't, disaster is assured for everyone but the corporations. Since corporations are required by law to deliver the maximum return on their investments, and no return comes close to buying political power, it should be obvious that there's a glaring contradiction in the libertarian position of more freedom for corporations and less for government. In the present American situation, there is no party that benefits from a larger government as much as corporations do. After all, they control the government.

{snip}

Our economic, financial, capital, and credit system is done and gone. What you're looking at today is a corpse propped-up by the promise of future tax revenues from millions upon rapidly increasing millions of homeless and jobless Americans.

Unfortunately, that's just the beginning. Because the financial system has been allowed to infiltrate the political system to the degree in which it has (a full-scale take-over), America's political system is as bankrupt as its financial system is. It will take a long and hard time to replace.

Fortunately, bloated and corrupt empires have historically collapsed from within. Given the modern "security state" we live in, that is the only way this American abomination of "democracy" will be replaced. I just don't see how a "populist uprising" will be allowed to get underway, let alone succeed.

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ever watch cable news?

It's absurd. They can fill up 24/7 on "analysis" and completely miss or never mention the real drivers or what most people want from the parties.

Every time they distort the issues to make it seem like it's one corporate agenda pitting against another one.

Well, all one can do at the moment is keep writing and analyzing.

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Never watch it.

Actually, I stopped watching all TV news programs (local, network, cable) shortly after the election last year. There is no point to watching this "fair and balanced" BS where talking heads from the left and right are allowed to just spew propaganda, without any resolution. Everyone is just talking past each other. It is pointless, contrived "debate".

The blogosphere is the only chance that the truth will be told. I'm not sure it will be enough, but it is our best chance at the moment.

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visual media junkie

and I'm starting to lose it because all TV is infomercial repeat noise to the point I think it could drive someone crazy if they had it on all of the time.

I flipped it on to see tonight's election results and of course had to actually go to the Internets to find out what the issues were and what people voted on.

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It pre-dated that by a long time

Everyone gets hung up on Gramm-Leach-Bliley Act. I don't know why.
It all started with Depository Institution Deregulation and Monetary Control Act of 1980 and continued with the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994.
These two acts, both passed by Democratic congress' and signed into law by Democratic presidents, did FAR more damage than Gramm-Leach-Bliley ever did.

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But GLBA

basically ex-post facto legalized the merger between citicorp and travelers insurance and salomon smith barney.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Chicken v. Egg

Good point midtowng, but there are a lot of opinions trying to identify timepoint zero. I wrote a blog last spring, making the case for groundpoint zero to be the Supreme Court decision of December 18, 1978 in the case of Marquette National Bank v. First of Omaha Service Corp..

Whatever point in history one identifies as the "beginning of the end", we can all agree on what we are left to confront. In this regard, who cares about where we went wrong? It only matters that we went assuredly wrong and changing it is not going to be easy, to say the least.

It is not a matter of blaming either Republican or Democratic regimes, they are both culpable. And, it is quite evident that there is little difference between the parties today.

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because it gets so confusing to even people tracking on this

a nice visual of a timeline of each piece of legislation, what it did in terms of damage, leading up to this point and how we need it back would be a dynamite blog post.

I could help make a graphic if you're game to take it on.

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Great Idea

As I was reading the comments I had the same thought about how I wish I had a timeline. I can't help. I need the help that a timeline would provide. I hope you guys can put one together.
Thank you

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