This article is another in the series on the fifth anniversary of the 2008 episode of the ongoing financial crisis and the third anniversary of the Dodd-Frank Act, the most recent in a long series of landmark bills enacted by Congress ostensibly to make sure that such financial crises would never happen again. However, none of the earlier statutes was ever effectively implemented, and I predicted from the outset that Dodd-Frank would share this fate.
In the late 1990s there was a television series hosted by Bill Cosby called "Kids Say the Darnedest Things." When viewing interviews such as the one on which this article is based, one sometimes has the sensation of watching a program called "Policymakers Say the Darnedest Things." Nevertheless, such interviews are historical documents that provide insight into either the thinking that motivated legislation or policy, the ex post justification of political and regulatory actions, or some combination of these
The background for this article is a panel discussion of the 2008 crisis presented by the American Action Forum, featuring a moderator, Steve Liesman of CNBC, and three panelists: former Rep. Barney Frank, D-Mass., former Rep. Bill Thomas, R-Calif., and economist Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office.
Ironically, of the panelists, the only one who played a significant role in the aftermath of the financial crisis was Frank. The others served as Republican appointees to a group called the Financial Crisis Inquiry Commission (FCIC), appointed by Congress to investigate the crisis.
The American Action Forum is "a 21st century center-right policy institute providing actionable research and analysis to solve America's most pressing political challenges."
For me, the most salient result of the inquiry was the conclusion of its chairman, Phil Angelides, that regardless of the provisions of Dodd-Frank, supposedly intended to prevent future bailouts of "too big to fail" banks, the authorities would find a way to effectuate another round of bailouts when the next crisis occurs. (Thomas, the former chairman of the House Ways and Means Committee, will go down in history as the prime sponsor of the prescription drug benefit that was layered onto an already overburdened Medicare program, thus contributing to the nation's ongoing fiscal and debt crisis that is playing out in the background as this is written.)
Thus, the main value of the panel is to document the denials by Frank that more bailouts are in store, which despite the elaborate construction of the argument and the conviction with which Frank delivers it, I find totally unconvincing.
An unidentified host introduced the event by stating that the crisis was not caused by a single event, but rather was "an ongoing process that had started many months and, depending on who you talk to, years earlier, but we still use Lehman as a useful shorthand." He added, "Most of the panel would agree that the crisis was a confluence of many events and an ongoing process."
Liesman, in his own introduction, referred to $16 trillion in lost wealth, millions of unemployed workers and a decline in housing values, but he recalled that it took economists Milton Friedman and Anna Schwartz 30 years to figure out what caused the Great Depression, so by this standard, the study of the 2008 episode is still in its early days.
Holtz-Eakin followed with a statement that the causes of the crisis were global in nature and traceable to the failure of a French firm that got in trouble with liquidity, so it would be useful to look at the global issues more thoroughly.
Frank stated that he agrees with most of the points made by the dissent to the FCIC report filed by three Republicans, that the private sector has the ability to outstrip the rules, that a lot of liquidity lies outside the banking system and that technology enables assets to be securitized and the buck to be passed among agencies who could regulate these activities.
Thomas quipped that the Commission was political in nature, not much was expected of it, and the Commission lived up to those expectations.
Liesman asked whether Dodd-Frank makes guarantees or makes it less likely to have another crisis. Frank responded that the Act makes a crisis less likely, because it empowers the regulators to be more innovative, although he admitted that the rules do not provide enough risk retention in asset securitization. Finally, he takes comfort in the idea that there is no aspect of the financial system that does not fall under the jurisdiction of some agency.
In response to a suggestion by Holtz-Eakin that Dodd-Frank missed an opportunity to reduce the number of banking regulators, Frank defended the roles of the Federal Reserve, the Office of the Comptroller of the Currency and state regulators.
He admitted that perhaps the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) should have been merged, but he immediately rejected this idea on the ground that the CFTC is too important to agricultural interests to make it feasible politically to consolidate these agencies. (At the same time, Frank appeared to miss the point that the same is true of the banking industry, but if pressed, he would probably agree.)
Liesman then asked what would happen now if a major bank got in trouble, which might come to light on a given Friday. Holtz-Eakin responded that the Fed has produced a paper denying that the authorities bailed out their friends, on the ground that they bailed out everybody. He raised the issue that grows out of the fact that only solvent institutions are supposed to be eligible for a bailout, but liquidity and solvency can be hard to distinguish in a particular case, whereas if enough liquidity is created in a crisis, the solvency issue appears to go away.
Liesman pointed to provisions of Dodd-Frank that purport to take away the power of the authorities to bail out individual institutions, by repealing the specific authority to do so under "exigent circumstances" and by taking away the ability to use the $50 billion Exchange Stabilization Fund of the Treasury that was employed to bail out the money markets. Thus, he suggested it would be necessary to go to Congress to waive, change or create a "window" under the law to enable a bailout.
At this juncture, Frank made a crucial point, that whereas formerly, the authorities could pay either all of the creditors of a failing institution or none of them, now they could be selective, taking into consideration the impact on the financial system of the effect of leaving some creditors unpaid. Thus, according to Frank, the bank would die at the behest of a federal "death panel," but some of the creditors could be paid for the good of the system, and the money would later be clawed back by means of assessments on banks with $50 billion in assets or more.
This is where policymakers say, and do, the darnedest things. Critics of Dodd-Frank contend that what the financial system needs is a regular process, like bankruptcy, to apply rules as to who would be paid and not leave it up to the discretion of regulators and bank lawyers.
Moreover, before one invests too much in the notion that the funds for a bailout would be clawed back, consider that the FDIC is now below its statutory coverage ratio for deposit insurance, with the new, more flexible, ratio not to be met until near the end of this decade.
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