October 26, 2009

What Vistas of Reform

Filed under: Reformism Can't Work — Russ @ 11:43 am


Nate Silver recently predicted that breaking up the Too Big To Fail banks is likely to be the big issue going into the 2010 election. As welcome as this would be, if it’s going to happen it’s going to happen from the bottom up, because the “reform” bill the establishment is cobbling together as we speak is a bogus bag of weakness and pretense. It further confirms what has already been proven, that no real reform will be legislated so long as the rackets exist. 
Let’s look at this bland, tepid stew they want to serve up.
The state of reform is dismal. Derivatives regulation had been gutted before it even reached the House committees, where they then took their own night-sticks to it. The proposed Consumer Finance Protection Agency was similarly hobbled coming out of committee. Meanwhile the administration has rejected out of hand the only thing which could truly constitute reform, breaking up the TBTF banks.  
In both cases we have the entrenched pattern of “government”: (1) fierce lobbying of pre-bribed administration officials and Congressmen to strangle reform in its cradle and, if possible, use it instead to extract further rents and set up further anti-competitive barriers; (2) corrupt, conservative, and complacent, government willingly submits. It’s apparently relieved to do so. it gives away everything the bounds of politics allow.  
If we were really serious about regulating the finance racket, we’d start with real derivatives regulation. We’d force all derivatives onto public exchanges and ban secret over-the-counter (OTC) trading.
Instead the rackets demanded the death of reform from the start. Even after all that’s happened they blithely said they could self-regulate. They got CDS oversight taken off the table. Then, when they couldn’t get the plan killed completely, they got the administration to submit a proposal which would leave gaping loopholes rent in the whole structure. Any company using derivatives to hedge operating costs would be exempt from the exchange. But the line between real hedging and speculation is impossible to discern, and the bill has been written in a way to err on the side of the speculators. Hedge funds and others will be allowed to pretend they’re legitimate and therefore exempt operators.
The Finance Committee bill also does not allow regulators to ban any practice no matter how obviously dangerous and fraudulent. Chairman Barney Frank openly boasted that his first priority was not to do anything which the big banks would consider “untenable”.
Meanwhile the CFPA was also heavily compromised in its inception. Here the banks used lobbying judo to turn reform to their reactionary advantage. Their main goal was to use the idea of the CFPA to override states who have engaged in real regulation. A weak CFPA will now preempt stronger state law.
It’s true that they didn’t yet get everything they wanted, which was straight preemption across the board. As it came out of committee, the bill will only let the OCC override where a state is deemed to be “significantly” uppity.
But they have the floor fight to try to do better.
The bill also exempts the vast majority of smaller banks from any active oversight. Just like with derivatives, it mostly forbids any restrictions on the kinds of products and trades allowed, no matter how abusive or reckless. (In both cases, the administration itself insisted on giving the rackets a free hand.)
Outrageously, the bill exempts auto lenders, one of the hotbeds of predatory and abusive lending, from CFPA oversight.
The bill’s supporters assure us that it had to be so racket-friendly in order to get out of committee (why?), but that it can be improved in the floor fight (why would those Congressmen be any less corrupt than those in the committee?). This is a typical symptom-obscuring scam. As the NYT editorial page says, “We can’t remember many finance-related bills that improved during the legislative process”. It’s the spoonful of sugary denial to help the corporatist medicine go down.
Meanwhile the administration continues to declare that artificially propping up the insolvent TBTF banks is the centerpiece of Obama policy. He will stake his presidency and his place in history upon this.
None of the proposed reforms even touches upon the existential issues of size and complexity. On the contrary, when Paul Volcker recently said the banks need to be broken up, and TARP inspector Neil Barofsky accused the administration of intentionally making the TBTF problem worse, they were smacked down.
Fed banker Dan Tarullo sneered that Volcker’s call was “more a provocative idea than a proposal”, while Bernanke said he wants “a more subtle approach without losing the economic benefit” of giant, inextricable banks.
(Beyond boilerplate they never explain what these benefits are, or how it is that everyone is wrong in not understanding what these benefits are.)
What is broadly happening here? The banks have been in their permanent war mode. Lobbying is a war of attrition, and so long as the rackets exist they will always eventually overcome any regulatory resistance. Of course the administration and Congress have not put up any resistance, and it’s hard to see who ever will. (Indeed the original administration derivatives proposal was written by the rackets themselves. There too they were using judo, trying to use reform to set up barriers to entry.)
Industrial organization economist Peter Fox-Penner recently laid out the problem. Each regulatory agency should have one mission; it shouldn’t have extraneous duties; its functioning should be simple; wherever necessary it should constrain product choices, as well as size and complexity in themselves; it should have the right balance of independence and accountability.
Instead what does Obama like in a regulator? The same things Bush liked. Agencies have multiple, ill-defined, diffuse, often contradictory missions; lots of non-regulatory duties (in particular, everyone is saddled with the mandate to help keep down the costs for business); instead of simplicity we have Rube Goldbergs devices everywhere, complexity for its own sake, loopholes galore, set up in order to make the regulator’s job impossible; all proposed regulation explicitly forbids any restraints on practice, size, or complexity (Obama and his cadres oppose size restrictions on ideological principle); no regulator is independent, but on the contrary is to be subject to constant scrutiny by political commissars, while the Fed is unaccountable in principle.
So long as the rackets exist, regulation can’t work. We should see their corrupting influence as if they were simple AI machines like the Terminator. They are objectively, existentially, congenitally incapable of doing anything other than this. (The exact same dynamic has been playing out with health care, climate change, and agriculture, to give three examples.)
There is something downright weird about what has happened to this country. More to the point, that there is no longer a country, in the sense of the people having any control at all over their own lives. Politics has ceased to exist in any meaningful sense; instead all we have is an astroturf polity, and astroturf media, astroturf elections. All of it involves masses indoctrinated to trot themselves out to “support” this policy or “vote” for that candidate, while the whole time every policy and every candidate are completely corrupted to the purposes of a few rackets. That’s the essence of what is no longer a democracy but a corporatist oligarchy dressed in a pseudo-democratic process.
We know now that finance capitalism lied about everything. It has spent forty years claiming it would create universal American prosperity. Instead it has done nothing but destroy: jobs, wages, stability of wealth distribution, the safety net, public services, public spaces, public politics, the quality of life itself, democracy itself, freedom itself.
Tarullo thinks changing this would be “provocative”? No, what’s provocative is the existence of this system of institutionalized crime. What’s provocative is that civilization is being burned down, and the arsonists are being allowed to walk free, with the loot and their firestarting equipment intact and enhanced.
So we can look to the system for nothing, no matter what empty words it utters. If the prophets of Change are to be proven right, the change will have to come from the grassroots.
In seeking this change we have to go with the realization that meager goals can never force what we need. Here the most pragmatic politics is also the most radical from the point of view of the establishment and the MSM.
Society cannot coexist with the rackets. One of them must perish.
We need a grassroots movement demand:
Break up the Too Big To Fail Banks! Too Big To Fail is Too Big To Exist! 


  1. In the vein of your essay I offer the following:


    And since I’ve linked to Denninger, I’d add the following, which I penned recently.


    Comment by Edwardo — October 26, 2009 @ 2:00 pm

  2. Thanks, Edwardo. One wonders where some of these guys have been the last forty years.

    Comment by Russ — October 26, 2009 @ 6:09 pm

  3. Russ asked (rhetorically, I imagine), “One wonders where some of these guys have been the last forty years.”

    It would seem they inhabit an imaginary world of ideological certainty and comfort.

    Comment by Edwardo — October 26, 2009 @ 11:50 pm

  4. Here’s a piece of hackery and straw-man building:


    Comment by Russ — October 27, 2009 @ 7:06 am

  5. nice article..

    Comment by financetips — October 27, 2009 @ 8:34 am

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