At Their Discretion

Signed, sealed, and delivered. There we have it: the most radical financial regulatory bill to pass Congress since the 1930s. Well, it's the biggest anyway. 2319 pages make a wide brush. And so, on a blog that has dedicated so much of its profanity-laced verbiage to the myriad depravities of modern finance, it seems only right that with this most recent effort to address (or avoid addressing) those same depravities, just bit more unnecessary verbosity is in order. As you can tell, I'm off to a good start.

Essentially, I've been trying to figure out what's actually in this bill and what it will all mean. Indirectly, of course. That is, I'm only assessing the assessments. It's not like I get paid for this. So anyway, here is my tremendously unsatisfying analysis: it is impossible to know what it will all mean.

If you've read any other commentaries on the bill so far, you've probably come across this same conclusion. By and large, what the bill sets about to do is to repair, tweak, and lubricate the American financial regulatory machine. Congress, it can be said, has given the bureaucracy a whole new set of fancy tools. What the bill does not really specify in most cases is how (or even whether) those tools get used.

So how does one interpret this? One could very easily don the rose-colored glasses and imagine a future in which this regulatory machine is manned (or in a particular news-grabby case, womaned) by those who both know and want to run it at full capacity. Or one can with, unfortunately, a much tamer imagination, don the glasses of recent history (which are certainly not rose, but beige, and flecked with the crystallized salt streaks of teary disappointment), and imagine a not so different future in which regulators ignore all the buttons upon their re-vamped console except for the one labeled "auto-pilot."

So here are some specifics (the sources I used are all at the bottom):

• First of all, and probably most consequentially, a new panel (the Financial Services Oversight Council) will be set up to figure out exactly which financial institutions fall under the new regulations and which do not (that is, which are "systematically important"). It will also review the overall stability of the global financial system. Presumably this crack team of top regulators will be able to identify problems as they arise and then act upon them in some such way. Kind of the like the Fed was always expected to.
• New regulations on capital levels (the quantity and quality of readily accessible "cash" banks have to hold on hand for a rainy, or panicky, day) are going to be implemented, the bill assures us. They will be drawn up by a panel of regulators who will presumably know what it is they're doing. No absolute numbers included, but current levels are set as a floor (and interestingly, the levels, the new law states, should expand and contract with economic activity.)
• Banks with government guarantees are restricted in the degree to which they can invest their own money for the financial return of the bank itself (this is the Volker rule); that is, acting like a hedge fund. The restriction is fairly liberal though (so I've read anyway), so the effect might be minimal.
  
• A new set of head-slappingly obvious but (maybe necessarily) vague restrictions are placed on the mortgage industry (e.g. you can't lend someone money if you aren't reasonably convinced he or she can pay you back).
  
• The ability of the government to seize, chop up, and liquidate problem institutions will be expanded to include non-banks. Which non-banks? Presumably companies like AIG and Lehman Brothers were in mind when this provision was put in, but I'm not sure. I've tried to figure it out. Either way, in the event that a "systematically important financial institution" has to get seized, the pool of money required to pay off their debts is not pre-funded, but may be borrowed from the Treasury, to be repaid subsequently by the financial industry as a whole with one-off, retroactive tax. Kablamo.
  
• A Consumer Financial Protection Agency is set-up. How much it does and how effectively it does it all depends on who the regulators are. It's potential authority seems broad, as far as I can tell though. A Tea Party's Czar to end all Tea Party Czars.
  
• Securitization is rationalized slightly. Any bank that tries to pawn off that hottest new pool of mortgages has to keep 5% of the thing on its books. This could potentially be a pretty big deal, though a major exemption exists for "qualified residential mortgages." Who makes the determination? The ever-watchful regulators, obviously.
  
• Rating Agencies, rather than being allowed to issue their ratings as opinions and thus under the protection of the 1st Amendment, are made liable. In other words, they might actually have to start doing their jobs. There are already some aftershocks on this one.
• Any firm that enters into a derivative contract will be forced to set aside some collateral and extra case, "just in case." Standard derivatives will be forced through clearinghouses (where an independent body makes sure both sides of each deal have their ducks in order) and then (as far as I can tell) onto an exchange of some sort (where the price of each standardized contract will be public to anyone. As for the riskier types of derivatives, regulated banks and non-banks will not be able to hold them directly. Instead, the interested party will have to set up a separate (isolated, funding, financial and legal liability wise) corporation, which it must nestle upon a pillow of "just in case" cash. All in all, this could be pretty good except for the fact that key terms such as "risky," "standard," "independent," and "appropriate collateral" will all be determined by...you guessed it...regulators.

Sources: (1) Lexology, summary, (2) Lexology, derivatives, (3) The Atlantic

So to re-articulate: the new regulatory order really has both the potential to surprise and to disappoint. And yet I worry. Finger-wagging ever impatient libs who seem only too eager to knit-pick Congress' latest Obama-approved watered-down compromise, Matthew Yglesias reminds us that "this regulatory setup, like all regulatory setups, only works if the regulators want it to work and that only happens if politicians want the regulators to want it to work."

Sure. A law only gets enforced if the cop wants it enforced. But why leave so much discretion to the cop?

Less-than-stale-toast

While they might not be very good at financial reform, healthcare reform, energy reform, or trapping John Boehner in a crystal pyramid until time itself howls and then is forever silenced, the Democrats have managed--with the help of the state of Maine--to prolong unemployment benefits. With the plug yet to be pulled on the American economy, the GOP will have to work that much harder to herd Congress's infamous liberal extremists into cattle cars come November.

On My Fears Upon Returning from Asia

The times they are a'changing. From the New York Times:

The increasing emphasis on more advanced skills raises policy questions about how to help low-skilled job seekers who are being turned away at the factory door and increasingly becoming the long-term unemployed. This week, the Senate reconsidered but declined to extend unemployment benefits, after earlier extensions raised the maximum to 99 weeks.

The Obama administration has advocated further stimulus measures, which the Senate rejected, and has allocated more money for training. Still, officials say more robust job creation is the real solution.

But a number of manufacturers say that even if demand surges, they will never bring back many of the lower-skilled jobs, and that training is not yet delivering the skilled employees they need.

In other words, the changes in the U.S. labor market are structural and long-term. The miss-match between what the majority of companies want out of their workers and what the majority of workers can offer isn't going to resolve itself in a hurry.

From some economist on some blog:

There is long-run structural change going on in the US economy - including a shift from manufacturing to services, and a shift in demand from low-skilled to high-skilled labor. We're all aware, I think, of the increase in the wage gap that developed 30 or so years ago between college-educated workers and those with less education. The housing boom masked some of what was going on, as it absorbed a lot of low-skilled workers. With the collapse in housing construction, we're stuck with the fallout - what some would call structural unemployment - which is making the unemployment rate higher than it would otherwise be.

And higher than it would otherwise be is probably where it will stay for the next decade or two.

These

This and then this.

America's Hat Also Has a Stupid Senate

Looks like you dirty Yankees aren't the only ones with a phenomenally screwy legislative process:

The Senate is working quickly through many of the bills that were passed by the House of Commons in recent weeks but one controversial piece of legislation seems to be stalled.

Bill C-311, drafted by NDP MP Bruce Hyer, would require the government to cut greenhouse gas emissions to 25 per cent below 1990 levels by 2020 and 80 per cent by 2050. It was supported in the Senate by Liberal Senator Grant Mitchell and has been read twice but has since been adjourned in the name of Conservative Senator Richard Neufeld. The legislation cannot move forward until he speaks to it.... Mr. Neufeld said on Wednesday that there has been no organized effort to keep the bill from being passed into law. If it is not addressed before the Senate rises, probably next week, it can always be raised in the fall, he said. “Our chamber has been pretty busy,” said Mr. Neufeld.

But the Liberals say they fear that the Conservatives are stalling until they obtain an absolute majority of Senate seats and can unilaterally kill the legislation - something that is likely to occur in November.

And Mr. Hyer said he has been told by Conservatives that the government has decreed that the bill cannot be passed into law.

“There are a number of Conservative senators who I have met with, who I am not going to identify, who are very sympathetic,” he said, “but they say they are getting tremendous pressure - they are being whipped.”

And guess what? It's been lazing around Ottawa since 2006!

The Climate Change Accountability Act was originally tabled in October 2006 in the Canadian House of Commons as Bill C-377 by Jack Layton, Leader of the New Democratic Party of Canada. It passed 3rd reading in that House with the support of caucuses of the Liberal Party of Canada, the Bloc Québécois and the NDP (the Conservative Party of Canada, led by Prime Minister Stephen Harper, voted against it). However, due to the 2008 Canadian federal election ending the parliamentary session prematurely, the bill did not achieve royal assent despite reaching the Senate. C-377 therefore died when the election was called.

The parallels here between the 110th Congress and our situation are obvious enough that I don't need to draw them out, but here's the kicker: we don't actually vote for our senators.

The Senate consists of 105 members appointed by the Governor General on the advice of the prime minister.[1] Seats are assigned on a regional basis, with each of the four major regions receiving 24 seats, and the remainder of the available seats being assigned to smaller regions. The four major regions are: Ontario, Quebec, the Maritime provinces, and the Western provinces. The seats for Newfoundland and Labrador, the Northwest Territories, Yukon, and Nunavut are assigned apart from these regional divisions. Senators may serve until they reach the age of 75.

I just want to make two little points towards the end of this quote-heavy post. One, when the Conservatives were out of power, all that I ever heard from my friends and their parents and, well, random dudes in restaurants wearing suits and cowboy hats, was that a Triple E Senate was a necessity to keep Canada from eventually breaking apart. The three Es stand for Elected, Equal, and Effective, as the Tories were weary of a senate stuffed full of liberals gumming up the works and, in their own little way, filibustering. Now that they're in power, and have been there long enough to have moved a number of people into the Senate, obviously they're not keen. Two, this bill is basically only demanding that Canada get to work on meeting the framework it has already agreed to in the United Nations. It isn't radical or overbearing or anything, it's had a series of readings, and it's already four years too late. Good god.

Summer Reading

Whenever I find something on the internet that interests me--about which I, correctly or not, presume myself to have something novel to say, or that I, (again) correctly or not, presume one or some or all of you might be interested in--I open up a tab and leave it there for later. Later, because I conduct most of my serious weekly internet scowering in those narrow bands of time between consciousness, work, and the weekend. And in those bands of waking, unoccupied or inebriated freedom that flicker by my each week, I am usually in a hurry (before work) or exhausted (after). So the grand masterstroke of biting analysis I had first envisioned only rarely becomes more than a stale tab of news past eventually deleted.

I have a few tabs open now. These tabs have been held open for too long now. My browser is getting sore. So, instead of deleting them, I thought I'd just post all the links here in a barrage of lazy, incoherence on my part. These links are not particularly thematically consistent (most of the news referenced therein is bad, so there's that). I just found them interesting, thought they were worth sharing, and figured at least a few of them might have slipped under a radar or two.

On Fossil Fuels:

• A Recent History of BP Being BP (Propublica)

• A Recent History of the Obama Administration Being Just Fine With BP Being BP (Rolling Store)
• Plus: Part Two
• Frakking Hell
  

I'll only add here that as maddening as the consistently lax regulatory oversight featured in all four of these stories may be, I couldn't help but think back to the Lisa Margonelli piece I linked to in a post back in May. Her basic premise was that if we aren't mining it from our own backyards, the oil and gas we consume is coming from someone else's. The disaster in the gulf is only exactly what the Niger Delta has been going through ever year since the 1960s. And on the issue of gas, this excerpt from the Propublica fracking piece speaks for itself:

Last month President Dmitri Medvedev of Russia said he would curtail natural gas production by the state company Gazprom until the study is completed. In part that’s because Medvedev isn’t sure there will be a viable market for Russian gas if the U.S. develops its domestic reserves, and because he believes that the regulations that could result from the EPA study could determine whether the U.S. drills its own gas, or imports it from overseas.

So, on our fossil fuel problem: It's demand, stupid!

On economic development:

• Ersatz Development (an LSE lecture series podcast)
  
• Dani Rodrik saying a similar thing in three paragraphs

I wanted to write something about the first link, the recorded lecture of Ha-Joon Chang, when it first came out months ago. I eventually gave up on the idea believing, probably accurately, that I wouldn't have much to say about it and that nobody would bother to listen to the whole thing anyway. But whether or not you bother to check out either of these, Chang and Rodrik hit on a pretty interesting (and obviously relevant) point. Development, they both believe, is not achieved by addressing adhoc and after-the-fact the symptoms of its absence (corruption, lack of access to health-care, poor education, etc). The definition of development they ascribe to is, instead, a process of macroeconomic structural change, in which the society as a whole moves from low productivity work to higher productivity work. And if those are the set of assumptions you carry around with you, the potential role of government you envision within that process is much, much broader.

On Financial Crises and How to Fix Them:

• Marxism Illustrated (11 minutes long, totally worth it, and regardless of your views on the overall ideology, hard to argue with.
• "Not Good Enough," says Feingold (Ezra Klein)
  

Back in March, I linked to Paul Krugman's article and posted the following:

There are times when even a highly imperfect reform is much better than nothing; this is very much the case for health care. But financial reform is different. An imperfect health care bill can be revised in the light of experience, and if Democrats pass the current plan there will be steady pressure to make it better. A weak financial reform, by contrast, wouldn’t be tested until the next big crisis. All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action — then fail in the clinch.

As to how things stand now, I've yet to read a comprehensive run-down of the entire bill (or at least, what's likely to be in the final-est of final versions). So, though I'd like to agree with Russ Feingold as a matter of mancrush, and though I'd like to seek comfort in my original cynicism, I honestly can't judge here. I just don't know very much about the bill itself. I don't know how strong the strong derivatives language is. I don't know how protective the consumer protection will be. I don't know how tough the tougher proprietary trading rules are. Anyone?

So that's that. And, just saying and everything, I would totally welcome similar suggested reading posts from all of you.