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.

Other Voices – December 8, 2009

Where else could Kashkari have gone?, Felix Salmon. Neel Kashkari flees the woods (literally) for PIMCO:

Now it’s entirely possible that Kashkari went to Treasury out of pure selflessness — but he’s blazed a trail now (or at least he would have done had he not been following in the footsteps of many who went before him) and in future anybody moving to Treasury can expect that doing so is liable to do wonders for their employability and their chances of ever making a seven-figure income.

Hmm. Jumping into the welcoming embrace of the private sector so soon after leaving one of the most powerful and undefined governmental roles in financial history does seem a little ... unseemly. Perhaps my suggestion for a merged SEC and CFTC that we should "[d]ouble or triple ... professionals' pay, and impose a minimum five-year ban on joining any financial services provider after leaving the agency" should apply to Treasury, too.

A Windfall Profits Tax for Goldman Sachs?, Steven Davidoff, The Deal Professor. Provocative, to say the least. I worry that I have become excessively attracted to punitive, one-off solutions to intransigent structural problems. Must be my inner Bolshevist asserting itself.

Compromising my values every day, for you., Ultimi Barbarorum. Baruch defends financial markets as excessively complicated and sensitive emergent phenomena unsuitable for clumsy tampering. I think he also argues against a transaction (or Tobin) tax in there somewhere, but I seem to have misplaced my extensive notes.

Build It, and They Will Come

Mike Konczal over at Rortybomb¹ has weighed in this morning on my reformist manifesto. For the most part, he does not seem to have disagreed with me overmuch, which is either a sign that I am on the right track or that Mike is too much of a gentleman to reveal to the world that I am a hopeless idiot. I prefer to believe the former, despite all evidence to the contrary.

Anyway, he specifically comments on a handful of my proposals. While I do not disagree with the substance of his remarks, I thought it would be useful to respond in this forum with a few clarifications and comments of my own. He repeats my proposals in bold and comments below:

2) Narrow and focus the role of the Federal Reserve…3) Render Fed actions and deliberations transparent.

To me this is an either/or. If the Fed wants to be the systematic risk regulator and use its 13 (3) privileges in an expansive manner going forward, there needs to be a change in the way they are monitored. I understand 13 (3) goes back 70 years, but given that the Fed will use these privileges more aggressively in the future then they need to be monitored in an equally aggressive manner. Removing these regulation powers to outside the Fed (as the Dodd Bill currently proposes), means that there isn’t quite the same need for transparency (though the way appointments are made could stand to be reformed either way).

I think we really agree here. My proposal is to narrow the Fed's mandate to its core responsibility for monetary policy and price stability but add "responsibility for monitoring, controlling, and managing systemic financial risk." If we commission the Fed to act as our overall systemic regulator, as I suggest, of course we should increase legislative oversight of it. It is exactly the sort of non-monetary policy decisions like the Fed made in the case of AIG and others recently that must be examined in retrospect under a clear and searching light. Just reassign the Fed's other responsibilities for consumer protection etc., which it has sadly neglected, to other parties. Monetary policy, as far as I am concerned, can remain largely unexamined and protected from political interference in the deep dark hole where it has resided for decades.

Put a Sock in It

Ooh, this is getting fun.

An unnamed bloggist at Salon.com has picked up my anti-Constitutional ball and is running with it. In a post this morning entitled "It's time for Wall Street to just shut up," (s)he gives more background on the reasoning behind the first proposal from the reformist agenda I posted here recently:

Yes, constitutional freedom of speech protections apply even to banks. But the system is clearly broken

The Epicurean Dealmaker has posted a ten-point manifesto for regulatory reform. Everything on it makes sense to me, starting with point one:

1) Ban political campaign contributions by the financial industry.

At The Baseline Scenario James Kwak observes that "there is at least one constitutional problem and possibly two" involved in the recommendation. That's a non-trivial issue.

But the financial industry's influence on legislation is equally non-trivial. There's got to be a better way. Check out the bombshell in Michael Hirsh's new Newsweek piece on Barney Frank and the perils of crafting new regulations for derivatives trading