Occupiers on Bank Law: Fix It

If the Occupy Wall Street protests stand for anything they stand for a popular demand to rein in the banks and to bail out the victims of bank excesses.  Those of us who study banking law for a living have an important role as public intellectuals, to grapple with where the banking rules broke down and how to fix them. We still have a great deal of work to do. 

Dodd-Frank fell short.  It consisted of a series of half-measures and punts to various agencies.  Break up banks that are too big to fail?  Dodd-Frank instructed the FSOC to think about it but not too much, and so far FSOC has followed its mandate.  Limit executive compensation? Instead we got shareholder say on pay.  Separate utility functions of banks from casino gambling?  In lieu of restoring Glass-Steagall, the watered-down Volcker Rule. Require banks to prevent every preventable foreclosure? Hasn't happened. Make them offer transparent and competitive retail credit and savings products?  Still waiting on a CFPB director appointment before we can work on that item.

Banks don’t make anything; they either provide payment and intermediation services, or they engage in various forms of gambling with other people’s money.  The first two functions used to be thought of as low-profit utility services (3-6-3), and were separated by Glass-Steagall and its weaker cousin Section 23A of the Federal Reserve Act  from gambling and speculation. 

Banks make, sell and rent money.  Our fiat currency (decoupled from gold by Republican President Richard Nixon), consists of IOUs from banks, which in turn depend entirely on the faith of people and businesses in those IOUs, and on the willingness of the United States taxpayers to back them up.  In other words, banks trade on government backing; it is their essential product.  The days are long gone when any sensible person would accept a purely private bank note as money.  For this reason, banking is fundamentally different from industries that make things and sell them.  We need to vigorously reassert this principle, and end the charade that regulation of banking is some sort of unwarranted intrusion into a free market enterprise.  We need to get serious again about real banking regulation.

Comments

[Rima Regas]

All true. The priority must be to get the money out of politics. Nothing will change until then.

[Ebenezer Scrooge]

Swing and a miss.

Alan White is arguing that regulation of the banking industry is legitimate. This argument has no opponents, apart from the random Paulite. Even the banks support bank regulation, or at least the perception of bank regulation.

Legitimacy is not the issue. The issue is the substantive content of bank regulation. White's post is weak here. It presents a number of suggestions as self-evident. They're not, even from the left. For example, regulation of compensation is a half-measure. Regulation of profitability, as is sometimes done with insurance, would be a more radical approach.

[Doug]

Home run.

[Patrick (G)]

I think that this confuses the regulatory failure as coming primarily from a lack of a adequate regulation as opposed to a failure to enforce the existing laws and regulations. Yes, a lot of banking
Regulation has been dismantled, but nobody has repealed federal laws against fraud and racketeering. Anti-trust law isn't what it used to be, but I think a case could be made against a Too Big to Fail bank that violates consent agreements with impunity (e.g. BoA in AZ per state AG).
CFBP put together a bunch of existing regulations that mortgage servicers are supposed to comply with. Very good, but wheren't there 7 regulatory agencies previously tasked with enforcing this stuff? What had they been doing? If the answer is: looking the other way to protect the banks, then no new regulation will help so long as the regulators aren't procecuted for corruption and breach of public trust.

[Moopheus]

I have to agree with Patrick--it's not only a matter of creating new or better regulations, those regulations have to be enforced. Some of the worst excesses of the credit bubble could have been avoided if regulators (and the DoJ) had been more interested in actually pursuing fraud cases (of which there was no shortage, large and small) and holding banks to the terms of various contracts and agreements. If the old rules were ignored, why should we believe that the new rules will not also be ignored?

[Mike Dillon]

Pat and Moo get it. All of the "regulation" in the world isn't going to do a damn bit of good if no one is willing to enforce it. We've ALREADY GOT all of the regulation we need in place. OK, maybe bring Glass-Steagall back to make it that much easier...

I have no problem saying it again - without enforcement of regulation all we've got is Robin Williams (Live at the Met) saying "Stop! Or I'll say "Stop" again."

[mt]

Since "banks don't make anything", perhaps, as a self-anointed "public intellectual", you can tell us what "public intellectuals" make.

Also, you're fundamentally wrong about the basics of the monetary system. Federal reserve notes do not depend on taxpayers' paying up. That is why they are fiat currencies. The government can always just print more of it, regardless of the tax collections. That is just what happened the past three years, yes? Deposit insurance might depend on tax collections to some extent in extreme scenarios that haven't been encountered yet, but not the money itself.

Given the wrong premise, I suggest the conclusions that follow are off base. As is the reference to "the victims of bank excess" who are few in number. I don't think the people in "Occupy Wall Street" are "victims of bank excess". They are more likely "victims of higher education tuition which resulted in no marketable skills in a heavily regulated economy excess".

In every society, the financial sector reflects the society's norms. There isn't a society in which the government and the financial sector are at odds for any length of time. Our politicians have pushed policies for decades that privileged debt-fueled consumption over long-term self-discipline - supported, I note, by a bunch of Keynesian academics and tub-thumping advocacy groups - and the financial sector has gladly done their bidding for a skim off the top. It's ridiculous for people to complain that banks - mere intermediaries, as you observe - should have disciplined the rest of the political economy.

[Richard Davet]

Our dear politicos bet the us treasury on the GSE Business Model. The GSE's told congress "don't worry about our MBSs, if they are no good, they must buy them back at par."

The borrower made one promise to pay, the GSE demanded buyback at par from the errant bank----isn't that the protection the politicos contemplated from the onset?

[reslez]

Dodd-Frank fell short? This is hardly surprising since the bill was corrupted from its inception by the institutions it was supposed to reign in.

The problem cannot be fixed by regulations or laws. The banks own 90% of Congress, they own 90% of the AGs, they own 90% of the courts. The banks rewrite legislation to suit themselves and harm their smaller competitors. They ignore regulations and laws as they please. The worst that banks ever have to endure is a minor fine and a promise to "do better next time" without admitting wrong. When regulators and legislators play ball the banksters reward them with entry to the club, campaign contributions, and high-paying jobs for themselves and their spouses. It's not only the game that's rigged -- the banks' financial power distorts the playing field itself. Additional regulations and laws will do nothing but cultivate further advantage for them. This must be obvious to 90% of the country by now, one wonders why it's so surprising to commentators like you.

For any change to take place the people themselves must take action. Everyone else has been bought.

As mt points out, banks don't truly create money. They create credit which is matched by a corresponding debit. These are extinguished when a loan is paid back. Banks do not and cannot create new net financial assets. Only the government can do this. Fiat money can be created by the government as needed without any corresponding government debt. Our current laws force the government to conform to a vestigial gold standard that serves only to further enrich the wealthy via interest payments on Treasuries. The law can be changed whenever Congress wants.

[jpe]

Whenever you hear "fiat currency," you can dismiss the speaker.

[Knute Rife]

jpe for the win.

[Alan White]

Interesting comments. "Fiat currency" is just a descriptive term used in most Money and Banking textbooks to distinguish convertible currencies (can be exchanged for stronger currencies, gold, etc.) from those that are not convertible. I use it not because I advocate restoring convertibility, but to make the point that US banks are inherently subsidized in profound ways. American prosperity, unequal and problematic as it is, has depended recently on the dollar's status as world reserve currency, and that in turn depends on an infrastructure that includes the Fed, FDIC, and the subsidy of too-big-to-fail. None of these should be abolished; they should be supported by an overhauled regulatory structure.

Absolutely right that regulatory failure includes enforcement as well as regulatory design and content. When I call for utility-style regulation of banks, I recognize that its effectiveness depends on enforcement, hence my link to Professor Omarova's paper on the Fed's failure to enforce Section 23A. An essential task for legal academics, one which has received some attention, is to describe regulatory capture and failure and to propose ways to fix it. OTOH, Dodd-Frank did not fully restore the separation of commercial from investment banking,did not effectively compel the break-up of excessive concentration in the industry, and certainly does not establish insurance-style regulation of profits.

[Mcnet]

"Those of us who study banking law for a living have an important role as public intellectuals, to grapple with where the banking rules broke down and how to fix them. We still have a great deal of work to do."

Yes, You do still have a lot of work to do. And the work you've done to share your expertise is invaluable to us laymen who want to make changes through unconventional channels.

Question is, "How is that work going to get done" or more importantly "How is that work going to get started?"

Dodd-Frank is a flawed opening salvo. Anyone expecting anything else (intellectual leaders or ordinary folk) is being disingenuous, given the dominance of the 1% in every area needing reform.

The dream of a silver bullet solution at this stage of 1% dominance is a fools paradise. So focusing on the failure of this govt to deliver that silver bullet is a distraction from looking for a real way out.

The only way things are ever going to change are by effective assaults from the margins (Volcker, the CFPB, Schneiderman's effofts, bloggers efforts to broadcast the damage to dirt law.) coupled with a mass movement (OWS) to chip away at the foundations of the elites.

And that's just in the US. The Euro meltdown introduces a nice element of unintended consequence to the next leg of post-Dodd-Frank reform here in the US.

Lamenting Dodd-Franks shortcomings misses the point. It simply re-emphasises the meme that our fate is dependent on the last ethical elite standing to lead us out of this crisis. I don't think that is your intent.

OWS is giving the lie to the fallacy of that meme.