Senator Ted Kaufman on Wall Street Reform

"Hard Lines, Not Regulatory Discretion"

Senator Ted Kaufman (D-Del) has a SUPERB analysis, titled "Wall Street Reform That Will Prevent The Next Financial Crisis," detailing exactly what caused the financial system to melt down in 2008 -- and what should be done about it.

Even better: he actually has a say in deciding the latter.

Here's a quick summary of the highlights:

--"Too Big to Fail": too big to fail equals too big to exist. Period.

As Sen. Kaufman notes, dismantling trillion-dollar behemoths is difficult in the best of times -- and impossible in a crisis.

So much for relying on a to-be-created "resolution authority" to step into the breach the next time there is a systemic crisis.

--The "more and better regulation" myth: the financial system melted down not because regulators lacked power, but because they didn't use the power they had. Ergo, giving them more power, now, isn't the solution.

Here is Sen. Kaufman's especially damning indictment of regulators:

The regulators sat idly by as our financial institutions bulked up on short-term debt to finance large inventories of collateralized debt obligations backed by subprime loans and leveraged loans that financed speculative buyouts in the corporate sector.

They could have sounded the alarm bells and restricted this behavior, but they did not. They could have raised capital requirements, but instead farmed out this function to credit rating agencies and the banks themselves. They could have imposed consumer-related protections sooner and to a greater degree, but they did not. The sad reality is that regulators had substantial powers, but chose to abdicate their responsibilities.

What is more, regulators are almost completely dependent on the information, analysis and evidence as presented to them by those with whom they are charged with regulating. Last year, former Federal Reserve Chairman Alan Greenspan, once the paragon of laissez faire capitalism, stated that “it is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk management techniques and risk-product design were too much for even the most sophisticated market players to handle properly and prudently.”

I submit that if these institutions that employ such techniques are too complex to manage, then they are surely too complex to regulate.

--Sen. Ted Kaufman

Add Senator Kaufman to the (short) list of public officials -- led by Paul Volcker -- who "get it" when it comes to reforming Wall Street and the financial system.

Strangling "Financial Innovation"

Tighter Regulation = Less "Innovation"?

Thirty years ago credit cards were exceedingly simple. They charged high annual fees just to own them (often $40-$50), high fixed interest rates (approaching 20%), and offered no cash rebates.

Today credit cards are more complex, but they are also better. They offer no annual fees for no-frills cards, flexible interest rates, and more benefits. Competition is fierce and consumers have a wide range of choices.

--Todd Zywicki, "Let's Treat Borrowers Like Adults"; The Wall Street Journal (7/08/09)

What I find interesting about Zywicki's op-ed piece is not his (rather lame) case against creating a consumer financial products safety commission, the goal of which would be to curb predatory lending practices.

Rather, it's his pitch-perfect channeling of Wall Street's strongest argument -- being revved up and honed as we speak -- for fending off tighter financial regulation.

Namely, that it would stifle "innovation."

Let's see . . .

On one side of the ledger, we have: almost $10 trillion in financial damage (and counting); the worst recession since the Great Depression; and the spectre of runaway inflation caused by huge Federal deficits ostensibly incurred to mitigate -- if not repair -- said financial damage.

On the other side of the ledger, we have -- exactly what?

No-annual fee credit cards with frequent flier miles??

Are you kidding me? Are they?

Bring on the regulations!

P.S.: let's hear it for simple credit cards that charge only 20%.