Other Voices – January 5, 2009

IMF study links lobbying by US banks to high-risk lending, guardian.co.uk (Jan 4). Three IMF economists conclude that extensive lobbying and political contributions by financial institutions were highly correlated with naughty behavior in the mortgage markets:

The paper, written by a trio of high-profile IMF economists, established that firms who spend more on buying access to politicians are more likely to engage in risky securitisation of their loan books, have faster-growing mortgage loan portfolios as well as poorer share performance and larger loan defaults.

The landmark paper will increase pressure on US politicians to regulate the mortgage industry, which Washington insiders say has so far been immune from meaningful financial reform in the aftermath of the bank crisis.

Highlighting 33 pieces of federal legislation that would have tamed predatory lending or introduced more responsible banking but were the target of intense lobbying, the IMF found that the efforts by banks to resist the legislation overwhelmingly succeeded.

"Our analysis suggests that the political influence of the financial industry can be a source of systemic risk," Deniz Igan, Prachi Mishra and Thierry Tressel wrote in their conclusion. "Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand better the incentives behind it."

More evidence from the archives of the Department for the Obvious Department on the capacity of directed influence and money to piss in the policy well. Is it time to reevaluate campaign contributions and directed lobbying as "protected speech" yet?

Fannie, Freddie, and the New Red and Blue, Matt Taibbi (Jan 4). The scourge of vampire squiditude and plutocracy everywhere sets his frame a little wider. In it, he comes to the conclusion, inter alia, that: 1) everyone was to blame for the financial crisis; 2) our entire socioeconomic system is endemically if not irretrievably corrupt; and 3) the mainstream media is incapable of interpreting these events and problems outside the lens of Red State–Blue State politics.

To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future. When it comes to bubbles, It Takes a Village ...

My prediction? Taibbi will rapidly tire of a fight in which there are so many combatants—many of whom, unlike Goldman Sachs, will have no compunction about fighting back without restraint. He will retire to the country and write clever hatchet jobs about despicable people and institutions who, because they do not gaze back when you look in the mirror, are much easier and far more entertaining for his readers to hate.

“Wake Up, Gentlemen”

[This post originally appeared at The Baseline Scenario on December 15, 2009. It is reproduced here in its entirety with the kind permission of the author.]

The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved. Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth. Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen. I can only say that your response is inadequate.”

Volcker has three main points, with which we whole-heartedly agree:

1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”

and most important:

3. “I am probably going to win in the end”.

Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.

This is entirely reasonable – although we can surely argue about details, including whether a very large “regulated” bank would be able to escape the limits placed on its behavior and whether a very large “trading” bank could (without running the payments system) still cause massive damage.

But how can Mr. Volcker possibly prevail? Even President Obama was reduced, yesterday, to asking the banks nicely to lend more to small business – against which Jamie Dimon will presumably respond that such firms either (a) are not creditworthy (so give us a subsidy if you want such loans) or (b) don’t want to borrow (so give them a subsidy). (Some of the bankers, it seems, didn’t even try hard to attend – they just called it in.)

The reason for Volcker’s confidence in his victory is simple - he is moving the consensus. It’s not radicals against reasonable bankers. It’s the dean of American banking, with a bigger and better reputation than any other economic policymaker alive – and with a lot of people at his back – saying, very simply: Enough.

He says it plainly, he increasingly says it publicly, and he now says it often. He waited, on the sidelines, for his moment. And this is it.

Paul Volcker wants to stop the financial system before it blows up again. And when he persuades you – and people like you – he will win. You can help – tell everyone you know to read what Paul Volcker is saying and to pass it on.

By Simon Johnson