I’ll confess to a bias: I mistrust any bank regulation plan that emerges from the Senate, that plush haven of special interests. I especially mistrust anything that emerges from the office of Chris Dodd, not exactly Mr. Ethics.
That said: I’m reserving judgment until I have done what counts in the blog world as my due diligence. And I’m biased in favor of the basic principle of the plan: the lodging of new regulatory powers somewhere other than the Federal Reserve.
The most fascinating thing to watch in the debate to come will be which party lines up with which interest groups. Democrats have historically carried water for the big investment banks and hedge funds of New York. As commercial banking has shifted out of New York, Republicans by contrast have enlisted to serve credit card issuers and mortgage lenders. Democrats can accept stricter consumer protection because their donors depend less on retail banking; Republicans resist because its their interest groups that collect 24% interest rates and $3.95 ATM fees from hard-pressed or ignorant borrowers.
Is there any kind of larger public interest here? If so, it will find few champions. As a friend of mine who works on Capitol Hill grimly jokes: “Congress exists to arbitrate disputes between the merely affluent and the genuinely wealthy.”
12 responses so far
1 sinz54 // Nov 11, 2009 at 8:56 am
The Dodd plan, if enacted in full, could destroy the Fed’s ability to prevent hyperinflation. The plan would effectively take away the Fed’s ability to set the prime rate, by giving the Senate influence over naming the directors who in turn name regional Fed presidents, who vote on interest rates.
I can’t imagine Congresscritters ever approving of hiking interest rates in a time of stagflation. I remember how liberals howled about Volcker’s sharp rise in interest rates 1979-82. But it was that policy that broke the back of the 1970s stagflation and ushered in a period of rapid noninflationary growth. Had the liberals had their way, we would have likely had hyperinflation–and perhaps a major economic collapse.
In fact, I can’t imagine politicians ever approving of higher interest rates under any conditions.
The Fed’s management of both interest rates and the money supply has prevented inflation despite the enormous increases in Federal spending during my lifetime. If it ain’t broke, don’t fix it.
2 balconesfault // Nov 11, 2009 at 11:33 am
I agree with Sinz to some extent on this one … but everyone should accept that when the Fed raises interest rates, that represents a declaration that we need to maintain some level of structural unemployment in our society in order to prevent hyperinflation. As the last couple balloons showed, the Fed has not pegged their interest rate hikes to increases in the money supply … but rather, to times when the unemployment rate drops to a point where there is a fear that employers will have to significantly raise wages in order to compete for resources in a available shrinking labor pool.
If this is to be part of our social contract – that we must protect the interests of the middle class (who are particularly hard hit by hyperinflation) and employers (who wish to avoid wage inflation) via interest rate policy – it lends an extra emphasis on why we have an obligation to provide a strong safety net for those who are in for periods of time shut out of the workforce via actual Fed policy.
3 Reason60 // Nov 11, 2009 at 11:43 am
A modest proposal-
Maybe we can require all Senators and Congressmen to wear jumpsuits with the logos of their sponsors on them, like NASCAR drivers. This way we can see who is representing whom, because right now it is a bit difficult.
4 LFC // Nov 11, 2009 at 11:56 am
sinz54 said… The plan would effectively take away the Fed’s ability to set the prime rate, by giving the Senate influence over naming the directors who in turn name regional Fed presidents, who vote on interest rates.
I can see it now. Some Senator or another blocking a nominee to the Fed because of their stance on abortion (which stance depending, of course, upon which party is in the minority).
I can’t imagine Congresscritters ever approving of hiking interest rates in a time of stagflation.
Continuing ultra-low interest rates are now viewed as a right, just like ultra-low taxes. The norm is now to run with absolutely nothing in the tank to combat a recession other than increased government spending, and even that has been rising in good times, especially under the last administration. Everything that could be used as effective short-term stimulus is now view as SOP by the supposed fiscal conservatives.
5 LFC // Nov 11, 2009 at 11:58 am
Reason60 said… Maybe we can require all Senators and Congressmen to wear jumpsuits with the logos of their sponsors on them, like NASCAR drivers.
I’m not sure it would work. I don’t think there would be enough material to hold all the logos. They might need to add a scrolling ticker tape style display on their chests.
6 sinz54 // Nov 11, 2009 at 12:09 pm
balconesfault:
No, not quite.
First of all, unemployment is NOT the way to fight hyperinflation. During the late 1970s, we had both high unemployment AND high inflation (stagflation).
Higher unemployment is a side effect of successful anti-inflationary policies like higher interest rates and a reduced money supply and cuts in Government spending and tax increases. And like most side effects of most medicines, it’s temporary–a few years, tops. In boom times like the 1980s and 1990s, unemployment can be quite low.
balconesfault:
There is no evidence that the Fed targeted the prevailing wage rate alone. The Producer Price Index and even the price of gold alone are much better leading indicators. Because by the time wages start being bid up, inflation is already here, in the form of higher prices for capital goods bought by business.
If you recall, the price of oil had been soaring before the summer of 2008; gasoline appeared to be heading toward $4.00 a gallon. That was starting to look a lot like inflation–until the summer of 2008 when the economy fell off a cliff, even though interest rates were still fairly low. It fell off a cliff because a giant speculative bubble in financial instruments finally burst–a bubble that been encouraged by low interest rates.
But as to your conclusion–that a strong safety net is needed to get Americans through the tough times–I would agree with you. The current economic mess would have been FAR worse for ordinary Americans, without the safety net we have in place: Unemployment insurance, COBRA, etc.
In the current economic mess, extending unemployment insurance benefits should have been part of Obama’s original stimulus package. In the short term, it would have helped ordinary working families much more than solar panels.
7 sinz54 // Nov 11, 2009 at 12:14 pm
Reason60:
The excellent website opensecrets.org has much of this information.
Here are the sponsors of Nancy Pelosi:
http://www.opensecrets.org/politicians/contrib.php?cycle=2010&cid=N00003675&type=C&mem=
And here are the sponsors of John Boehner:
http://www.opensecrets.org/politicians/contrib.php?cycle=2010&cid=N00003675&type=C&mem=
8 sinz54 // Nov 11, 2009 at 12:16 pm
Oops, these are the sponsors of Pelosi:
http://www.opensecrets.org/politicians/contrib.php?cycle=2010&cid=N00007360&type=C&mem=
9 Travis // Nov 11, 2009 at 4:09 pm
Sinz54, thanks for the links.
Of the ~85 companies on both lists (Boehner and Pelosi), 9 contributed to both of them. So not only is the $ rolling in for these 2 jokers, 10% of those contributing are giving to both!? It’s just so disheartening to know that these people are supposed to represent you and I…yet it’s obvious who the real constituents are to them (as I sit here with my 1 vote and $0 contributed to a candidate).
This is nothing new, of course, but it still sucks. What can we do? Campaign finance reform? A 3rd major political party? Those who benefit from how things are now will never let that happen.
Any other ideas?
10 James Cody // Nov 11, 2009 at 4:26 pm
“Democrats have historically carried water for the big investment banks and hedge funds of New York. As commercial banking has shifted out of New York, Republicans by contrast have enlisted to serve credit card issuers and mortgage lenders.”
Interesting point, and you might be largely right, but why do Dems want resolution authority for large non-commercial banks while the GOP opposes it? Commercial banks are already subject to resolution authority, with the FDIC typically becoming receiver, but part of the chaos from last year was the lack of resolution authority for non-commercial banks (Bear Stearns, Lehman, AIG, etc). Note that WaMu, Wachovia, Fannie/Freddie (which became subject to resolution authority in the summer of 2008), etc, did not cause panics. It was the institutions that were subject to the normal bankruptcy code, and not government enforced resolution authority, that caused panic and collapse.
Dems, reasonably IMHO, want to have resolution authority for non-commercial banks. The GOP, irrationally IMHO, opposes it as a power grab. As I understand it, the big non-commercial banks oppose resolution authority because the lack of such authority means the government will bail these institutions out (so the normal bankruptcy regime won’t come into play even then), and that implicit government guarantee means the big non-commercial banks can get cheaper credit and subsidized financing. So it doesn’t seem that your Dem/GOP split plays out with resolution authority, and I do wonder if that’s an indication that this isn’t about special interest groups, it’s about about classic ideology (specifically, in the case of resolution authority, I think the Dems are clearly right, but the GOP simply can’t ever accept a government role in the private economy).
11 MI-GOPer // Nov 11, 2009 at 7:25 pm
WildBill says: “Republicans by contrast have enlisted to serve credit card issuers and mortgage lenders…”
Not so fast with the trigger finger, there pal… of the top nine mortgage lenders, seven of them are run by Democrats and Democrat-leaning executives… it’d be 8:9 if Chrissy Dodd’s buddie Angelo Mozilo of CountryWide weren’t indicted for multiple felonies… by the way, why do think it was that Angelo Mozilo looked more like a slick trial lawyer than a mortgage banker? Is it because most Democrats clearly respond better to sharkskin suits, flashy ties, perpetual tans and slick talkers without an ounce of sincerity? Yeah, I think so too. It’s why Obama and John Edwards made it so far.
In the 08 election, sleazy mortgage lenders gave more money to the Democrats than to the GOP. And in the ‘10 elections, it’s the same –likely to increase the spread toward slick Democrats.
http://www.opensecrets.org/industries/indus.php?ind=F4600
In the last decade or two, Democrats have gotten a greater percentage of money from mortgage lenders than the GOP… 90 races? Dems 60-40%; 92 races about even; 94 races 64-36% Dems; and so forth.
Care to rephase your claim?
12 aDude // Nov 11, 2009 at 7:57 pm
Perhaps I’m old fashioned, but I dislike the idea that the Fed should raise interest rates to prick bubbles. To me, the sole function of interest rates should be to control inflation. If there is an asset bubble forming (stocks, real estate, oil, gold, whatever), then specific manner of dealing with it should be used rather than the rather blunt instrument of raising interest rates. It does not seem to be wise to punish the entire economy because one sector is consuming mind altering substances.
I also really dislike the idea of Congressional meddling in the day to day activities of the Fed (like interest rates, etc). Congress should focus on the matter of confirming good choices to the Fed board and then let them do their job.
That said, someone (and it doesn’t have to be the Fed) has to be responsible for systemic regulation. When Lehman collapsed no one (not even Lehman) could even say with any degree of certainly the extent to which Lehman was involved in the CDS space. Someone should have been aware that AIG was in essence issuing $20 million in insurance on $1 million of asset. It should not have been such a surprise that Bear Sterns was a castle built on rapidly eroding sand.
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