Krugman on the Other Surprising Obama Success Story No One Is Talking About
Pretty much no one has liked the administration's push for financial reform, a.k.a. the Dodd-Frank reform bill, Paul Krugman writes in Mondays New York Times column. The right, of course, because they don't like anything this president does; the left because it does not go far enough. As with Obamacare, the reform bill was a compromise that satisfied almost no one.
And yet, Krugman sees some bright sides to it, in particular to two pieces: "the creation of an agency protecting consumers from misleading or fraudulent financial sales pitches, and efforts to end 'too big to fail.'"
Krugman gives the background on the Consumer Financial Protection Bureau:
The decision to create a Consumer Financial Protection Bureau shouldn’t have been controversial, given what happened during the housing boom. As Edward M. Gramlich, a Federal Reserve official who warned prophetically of problems in subprime lending, asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He went on, “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” The need for more protection was obvious.
Of course, that obvious need didn’t stop the U.S. Chamber of Commerce, financial industry lobbyists and conservative groups from going all out in an effort to prevent the bureau’s creation or at least stop it from doing its job, spending more than $1.3 billion in the process. Republicans in Congress dutifully served the industry’s interests, notably by trying to prevent President Obama from appointing a permanent director. And the question was whether all that opposition would hobble the new bureau and make it ineffective.
And then he offers up the good news. (Isn't good news a refreshing change?) which is that it looks like the bureau is actually doing its job (yes, this is what passes for good news these days.) Notably the bureau is "cracking down on billions in excessive overdraft fees," Krugman writes.
So, that is something, and the reduction in bad loans is also a good thing and reduces the chances of another financial crisis such as we saw in 2008.
If a crisis occurs anyway, the government will again step in to stem it. Here's where it gets sticky, according to Krugman, because "how do you rescue the banking system without rewarding bad behavior. In particular, rescues in times of crisis can give large financial players an unfair advantage: They can borrow cheaply in normal times, because everyone knows that they are 'too big to fail' and will be bailed out if things go wrong.
As readers of Krugman know, he never asks a question that he himself cannot answer.
The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save “systemically important” banks and other institutions without bailing out the bankers.
Shockingly, bankers don't like that idea. Nor do their proxies in Congress. But in Krugman's estimation and that of the Government Accountability Office, the reform is doing its job. "A new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared, he writes. "To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do."
Don't worry. Krugman has not gone all pollyannish on us. The reforms did not go far enough. But one indication that they are "an important step in the right direction" is that Wall Street and its friends in Congress are still fighting like hell to have them repealed.
What's that quote Obama likes about not letting the perfect be the enemy of the good? Seems applicable here.