Fluctuations in Banking Regulations

Throughout the economic history of the United States, government regulation has declined during times of prosperity and increased in times of national crisis. During periods of economic prosperity, banking regulation receives little to no attention as the focus is placed instead upon securing individual prosperity. In an article concerning trends in banking regulation, David Leonhart discusses the repercussions of fluctuating bank regulations. He writes the following:

By definition, the next period of financial excess will appear to have recent history on its side. Asset prices will have been rising, and whatever new financial instrument that comes along will look as if it is safe. "When things are going well," Paul A. Volcker, the former Fed chairman, says, "it's very hard to conduct a disciplined regulation, because everyone's against you." Sure enough, both Bernanke and Geithner, along with dozens of other regulators, overlooked many signs of excess over the past decade.

The article strives to convey the importance of keeping banking regulation a priority in both times of prosperity and crisis. It is necessary that a perpetual state of regulation be enacted to protect individuals from fiscal losses incurred by corporate misjudgment. Additionally, the U.S. government will be saved the costs of repairing financial meltdowns if a standard yet flexible bank regulation be put in place.

The argument for increased banking regulation is supported by the comments of Arnold King regarding Leonhart’s article. King writes about the essentiality of time consistency in banking regulations. Simply because times are good, King points out, does not justify lax regulations. Rather, the solution lies in “making credible commitments not to bail out failed banks” and “that you need to make credible commitments to keep rules in place when times are good”. In employing these precautions and standards, a commitment to today’s regulatory regime will remain intact.

For further reference and to view the article, please visit the Library of Economics and Liberty website at:

(http://econlog.econlib.org/archives/2010/03/time_consistenc_1.html)

A field trip to the (outside of the) New York Fed

I had the distinct pleasure of spending my Spring Break in the world's greatest city, New York. (Skeptics, lay down your spears, they've got it by a long shot). Among the requisite hours of wandering the lonely grey streets by myself, and out of a clear duty to the undertakings of this blog, I paid a visit to one of our government's most notoriously lavish (or is it lavishly notorious?) buildings, the Federal Reserve Bank of New York.

Of course, though, I didn't go inside. More specifically, I wasn't allowed inside. If I'd wanted to, I would have had to make plans six weeks in advance, via direct communication with Ben Bernanke, his permission written in stone with blood (OK, the blood part is exaggerated). Nonetheless, even if I'd had a tablet with Ben's hancock on it, the guard's general air of nonplussedness makes me wonder if I'd have been allowed in.

So instead of taking a look inside, I made a circle of the block on which the building stands. The above picture gives you an idea, more or less, of the appearance of the building. Why, it looks like the Egyptian pyramids made out of granite! you say. Yes indeed, it does. I'd bet these blocks were rolled vast leagues upon giant logs, with the aggregated will of many thousands of peasant hedge fund managers. Every fifty feet or so, between those giant stones, each first floor window has been covered over with a slab of concrete, which is in turn caged by wrought iron bars. Apparently they want to keep what's outside, out, and what's inside, in. At least that's what I took from the experience.

I had read in David Wessel's book In Fed We Trust that several hundred feet below the Fed building, upon the bedrock of Manhattan Island, is The Vault, where many tens of gazillions of dollars in gold bullion are stored. Not one to miss my chance to cash in, I found a plot of dirt (hard to come by here) and started digging.

A word to the wise: several hundred feet is a long way down. After three to four slog-filled minutes, replete with bloodied knuckles and awkward stares from passers-by, I lay down my tools (an empty Dunkin Donuts cup and a toothbrush I bought at Duane Reade) and was beaten.

As I vacated the premises (the guard's words, not mine), I noticed I was not alone in my desire to stand up to The Man (and also not alone in ultimately losing out). On the opposite side of the building from my mining experiment was another apparent member of the Rebel forces, under the glare of a non-so-official-looking deputy, cleaning from a low corner of the Fed what looked like graffiti.

Judging by her violet-colored fleece of the North Face variety, and her comfortable-looking Keen shoes, I estimated she was from the Pacific Northwest, having made a sort of anti-pilgrimage to the East to protest evil financial practices that are probably irrelevant in the Northwest, anyway (I have heard most people up there live deep in the woods, eating only granola and what they can forage from streams and with hatchets [my sources for this information are Bill Bryson and Gary Paulson books]). I offered some silent solidarity to her struggles and went on.

What did I learn from this trip? To be honest, not much. Mostly that you should wear gloves when you dig in Manhattan. Then again, the Federal Reserve does seem kind of important in the whole scheme of things, holding a lot of our money and stuff, and trying to keep our economy afloat, you know? At first I thought those big thick walls were a little bit showy and standoffish, but considering what goes on inside, I could maybe kind of see why they pay a tough guy to stand at the door telling people like me to go away. Whatever. I don't know. What do you think?

Chris Dodd continue...

Adding on to the previous post about Senator Dodd, the Daily Show on March 16 talks about Dodd's proposal. This talks about how Dodd had been working together with Republican senator, Bob Corker, but then suddenly decided to quit the talks with Corker and will discuss his own bill this coming Monday about the financial regulations. It talks about the same regulations (in less detail) discussed in the blog post previous to this, but this clip is worth watching.

http://www.thedailyshow.com/watch/wed-march-17-2010/in-dodd-we-trust

Senator Dodd's Regulation Proposal

Last week Connecticut Senator Christopher J. Dodd (Dem.) proposed a new plan for rectifying financial regulation. The proposal calls for the creation of a Bureau of Financial Protection which would modify the Consumer Financial Protection Agency supported by the House last December. If accepted the bureau will be responsible for regulating and preventing mortgage, credit union and payday loan deception amongst other financial issues which violate consumer safety. Senator Dodd recommends the following be implemented:

• the creation of the bureau within the national Treasury Department


• an independent director whom the president appoints


• a budget derived from fees obtained from large banks and other lenders


• obligatory discourse between existing bank and credit union regulators to ensure new rules are agreeable to all parties involved

The proposal is contested by big bank lobbyists and consumer advocates regardless of political alliance. Those in favor of big banks argue that the proposal will allow for an unnecessary increase in government control of financial industries and will impose upon existing regulators whom already ensure consumer safety. On the other hand, consumer advocates oppose the plan because it will only allow for regulation of banks and credit unions which maintain gross assets rather than all financial institutions. Additionally, requiring discussion with existing regulators, those deemed responsible by some for the financial crisis, limits the independence of the bureau to create new rules beneficial to the public.

Proposals introducing new policies which affect financial regulation will continue to elicit controversy. Government officials must consider the interests of lobbyists but ought not place them above the needs and protection of the consumers. It is time for the government to settle upon a financial regulation reform plan which benefits the American public not private interests.

For further information please see the attached New York Times article:

http://www.nytimes.com/2010/03/01/business/economy/01regulate.html?pagewanted=1

Regulation Difficulties

A couple of the major ideas for reform in the banking system are: 1. There's talk about reducing the maximum size of banks, or capping the market shares within banks. and 2. there will be some form of increased separation between commercial banking and investment banking. But obviously this won't be easy to accomplish. Many of the current financial techniques in the United States, which were main contributors to the crisis (earlier posts have touched on some of those subjects/techniques), make it so big firms and corporations are able to avoid these regulations. Also, our financial system is obviously involved in global economic networks, so it is difficult to impose reform that would also prevent future crises on an international level as well.
http://www.forbes.com/2010/01/27/obama-volcker-economy-business-banks-oxford.html

One example dealing with the international tension among the bankers, is discussed in an article from the Wall Street Journal, "Banker Bashing Masks Rise of China." http://online.wsj.com/article/SB10001424052748704107204575039013978842230.html?KEYWORDS=banking+reform Here several countries met at the World Economic Forum in Davos, Switzerland, discussing mainly China's role in the global economy today. First of all, the United States dollar is the international dollar. This means that countries involved with international investments in the World Bank needs to trade or invest in the United States in order to receive our currency, which has been the way of the global economy ever since the world ended the era where countries used blocks of gold as their money investing. But now, due to our banking downfall, countries are unhappy with us still having that authority, thus having great tensions at the convention. But as of now, we the US would be affected by this negatively by keeping it this way as well. This article discusses a reporting from James Harding, editor of The Times, which explained more how this would affect our economy.

Among the most striking things he heard at Davos was the belief expressed by a senior Chinese official that the dollar carry-trade was the single biggest threat facing the global economy. The official was concerned that if the U.S. economy weakened, the unraveling of the trade—in which investors borrow at low interest rates in dollars and invest in higher yielding assets elsewhere in the world—would bring huge disruption to the capital markets. He estimated that as much as $1.5 trillion was already invested in such strategies.

So it makes sense that reforming our regulations is difficult on many levels, since we have to deal with other countries as well as our own. "The hostility against bankers [at the forum] was hardly surprising," said Gerard Baker, deputy editor-in-chief at The Wall Street Journal. What was surprising was "the ferocity and provenance of that hostility."

But since the bankers know reforms are vital right now, and are deeply concerned with what reforms are going to be implemented and how they are going to be implemented, they are unaware of their fellow US citizens' opinions and thoughts. An editor-in-chief for the Wall Street Journal, Patience Wheatcroft, quoted Christine Lagarde, the French finance minister, of the public's anger. "'Bankers still don't seem to get just how angry people are.' The backlash from companies that are resentful about the level of fees they have been asked to pay banks has also now come to the fore."