12:00 AM, Jul 26, 2014 • By IRWIN M. STELZER
Celebrating a fourth birthday and growing nicely. That’s the story of the Dodd-Frank law, designed to end a “too big to fail” banking system that forced taxpayers to bail out bankers who took not only their own banks but the entire financial system to the verge of collapse, and brought on a record recession. Dodd-Frank, which weighed in at over 2,000 pages at birth, has since put on 14,000 pages of implementing regulations, with more to come. Lawyers here in Washington, as always the big winners when the politicians decide to fix something, estimate that the delicious regulation-writing is only half done, and that it will be five-to-ten years before all the required 400+ rules are in place. Enough fees to fund the college education of their children and, with luck, their grandchildren.
Still to come are rules requiring greater transparency for complicated transactions, and tougher rules to govern the credit rating agencies that splashed AAA ratings on duff securities, and still earn their fees from issuers only if their ratings are high enough to allow the transactions to proceed. The SEC has already notified S&P that it might face fraud charges in connection with some of the credit ratings it issued in 2011.
By which time dozens of amendments will have been added to the existing statute. Some 80 percent of the voters polled by Lake Research Partners say tighter regulation of Wall Street is needed. No surprise that President Obama, for whom bankers are his favorite whipping boy -- or a close second to Republicans -- used the occasion of a recent radio interview to call for additional measures to reduce risk-taking by financial institutions. Republican senator John McCain joined with Democrat Elizabeth Warren, the current darling of the White House and the party’s left, to go further: hey introduced legislation to completely separate risk-taking investment banking from plain vanilla deposit-taking. The so-called Volcker rule, which prevents banks from making risky bets with their own capital, will not go into effect until next year, at which time we will find out whether it accomplishes by rule what McCain-Warren aims to achieve by breaking up the banks into separate risky and non-risky institutions.
Regulatory cost is not the only problem Dodd-Frank has created. The regulatory maze awaits banks with assets of more than $50 billion. So banks approaching that size have an incentive to cut back on lending, since the borrowers’ IOUs are assets for the bank. Such credit squeezes by “small” banks hurt their small- and medium-size business customers, the very ones being counted on to grow and create the jobs that might turn the feeble recovery into a robust one, and relieve Fed chairwoman Janet Yellen of any guilt she might feel at tightening monetary policy.
Fortunately, Dodd-Frank seems to have accomplished more than to provide a flow of legal fees.
· The “stress tests” to which banks must submit periodically encourage more sensible management of risk.
· Banks now have “living wills” that lay out liquidation procedures aimed at forcing share- and bond-holders to bear all of the losses should a bank fail; taxpayers presumably will not be called on again to bail out a failed bank.
· Dodd-Frank has forced banks to shore up their capital bases, at the expense of their profits.
· By requiring banks to back riskier assets with greater amounts of capital, the law has forced many of them to withdraw, at least in part, from the businesses that placed their customers’ funds at the greatest risk and put taxpayers on the hook should a bank fail. Which might make the Volcker rule less important when it finally comes into force.
· Firms that sell securities backed by bundles of mortgages now must keep some skin in the game, to use Wall Street (or is it Las Vegas?) jargon for retaining an interest in those securities.
· Rules issued late this week by the SEC might just prevent the sort of run on money funds that contributed to the Lehman-triggered panic.
As always with these sorts of rules, there are exceptions, “loopholes” inserted by well-connected lobbyists, but we can’t let the perfect be the enemy of the good.
9:35 AM, Jul 17, 2014 • By FRANK LAVIN
The discussion over economic inequality in the United States seems to have captured the public imagination, at least on the political left. President Obama has called it “the defining challenge of our time,” and Secretary Clinton has deemed it “a cancer.” Given the shorthand manner in which politicians sometimes refer to policy matters it is not always clear if Obama and Clinton are referring specifically to inequality, the ratio or distribution of wealth in society, or to raw poverty—the fact that millions of Americans live in impoverished circumstances. There is a keen difference in which of these two approaches one takes to the challenge of alleviating misery. Here, I’ve devised a simple test to understand the issue:
For better or worse.12:00 AM, Jul 12, 2014 • By IRWIN M. STELZER
All good things must come to an end. And bad things, too, if you believe that the Federal Reserve Board’s bond buying program was a mistake. The minutes of its June 17-18 monetary policy committee meeting, published a few days ago, reveal that these purchases, largely credited with keeping long-term interest rates lower than they would otherwise have been, will come to an end in October.
10:22 AM, Jul 10, 2014 • By GEOFFREY NORMAN
Initial claims came in at 304,000, slightly less than expected (315,000) and low enough to keep the low flame of optimism burning after last weeks good jobs number.
12:00 AM, Jul 5, 2014 • By IRWIN M. STELZER
After celebrating our Declaration of Independence from the British oppressor, we will return to work Monday having consumed 155 million hot dogs and, for some 41 million of us, bucked traffic jams, long security lines at airports, or storm-induced flight delays in order to visit family or whatever place attracts us in this huge country of ours.
12:46 PM, Jun 26, 2014 • By GEOFFREY NORMAN
In the first quarter of 2014, GDP in the U.S. plunged at a 2.9% annual rate, and productivity—the inflation-adjusted business output per hour worked—declined at a 3.5% annual rate. This is the worst productivity statistic since 1990. And productivity since 2005 has declined by more than 8% relative to its long-run trend. This means that business output is nearly $1 trillion less today than what it would be had productivity continued to grow at its average rate of about 2.5% per year.
12:00 AM, Jun 21, 2014 • By IRWIN M. STELZER
And we thought the bad old days of oil shocks were over. Embargoes, price spikes, gasoline lines in America, a sweater-bedecked president ordering the end of hot water in many facilities, collapsing retail sales as high gasoline and energy prices hit stores as much as a big tax increase would, economic stagflation, or worse. Well, it just might be that we were wrong to believe that danger to our continued prosperity has been removed with the death of theories about “Peak oil.”
8:42 AM, Jun 19, 2014 • By GEOFFREY NORMAN
Weekly first time unemployment claims came in almost exactly as expected (which, in itself, is sort of unexpected) at 312,000. One thousand less than economists were predicting and 6,000 less than last week. Which amounts to something like treading water. We aren’t drowning, but we aren’t getting any closer to shore, either.
12:00 AM, Jun 14, 2014 • By IRWIN M. STELZER
Until Eve’s encounter with the serpent, Adam did not spend a lot of time looking for work. Didn’t have to. Expelled from Eden and cursed with the necessity of earning his bread “in the sweat of his face,” he found work. Had to. Therein lies a partial, but only partial, explanation for one of the strange developments in America’s labor markets.
12:00 AM, Jun 7, 2014 • By IRWIN M. STELZER
It is mandatory for economists to point out that one data point does not make a trend. We then all-too-often fill space with, er, a discussion of one data point, most usually the monthly report on job creation. Not being one to defy convention, I will report that Friday’s jobs report was a yawner. The 217,000 new jobs created in May finally pushed total jobs above pre-recession levels, but the unemployment and labor force participation rates remained unchanged at 6.3 percent and 62.8 percent, respectively. No post-winter jobs growth spurt, at least not yet, but no reversal of recent growth either.
9:27 AM, Jun 5, 2014 • By GEOFFREY NORMAN
More people filed for unemployment last week than had the week before … But the average for the month of May was lower than it has been since 2007.