Monday, April 17, 2017

Bill Black — Dodd-Frank Was Designed to Fail – and Trump Will Make it Worse

Here is what [out-going chairman of the Federal Financial Institutions Examination Council Daniel] Tarullo actually admitted about Dodd-Frank’s fatal flaw. President Obama and Congress did not frame it as a coherent response to the perverse incentives that cause our recurrent, intensifying financial crises. Wall Street CEOs rigged our structures to institutionalize perverse incentives. Refusing to change those structures after a catastrophe was, of course, significantly insane. President Obama and Congress failed to engage in a rigorous, honest investigation of those structural causes and then refused to fix the structural defects.
The structures that institutionalize perverse incentives have in common the creation of conflicts of interest. CEOs do this primarily by creating perverse compensation systems, but they also do it through combining investment and commercial banking. Systemically dangerous institutions (SDIs) (“too big to fail”) create another conflict of interest. Politicians dependent on their contributions and pathetic regulators treat them as untouchable. Astonishingly, Obama and Congress refused to fix any of these three primary conflicts of interest that drive our recurrent crises.
New Economic Perspectives
Dodd-Frank Was Designed to Fail – and Trump Will Make it Worse
William K. Black | Associate Professor of Economics and Law, UMKC

13 comments:

lastgreek said...
This comment has been removed by the author.
lastgreek said...

I know it's off topic, but this was too good to wait for a Fed thread :)

Stephanie Kelton‏ @StephanieKelton 10 hrs ago
Minsky noting that once central bank buys the bonds, it's as if @USTreasury never issued them in the first place. http://digitalcommons.bard.edu/cgi/viewcontent.cgi?article=1445&context=hm_archive …

"If we consolidate the books of all the government agencies, then the Treasury debt held by the Federal Reserve Banks would appear as both an asset and a liability of the government. Such internal financial arrangements are usually ignored - the debt to all practical purposes does disappear once it enters the Federal Reserve

Ralph Musgrave said...

Lastgreek, Yup: quite a few people have made that point. I.e. government debt in the hands of a central bank might just as well be scrumpled up and thrown on the fire. Doing that would have no effect on the real economy.

I made that point in a letter to the Financial Times a year or two ago.

Matt Franko said...

Didnt we already know this?

Is this advancing our understanding?

Matt Franko said...

(Sorry.... talking about Greek's "revelation ")

Matt Franko said...

"Here is what Tarullo actually admitted about Dodd-Frank’s fatal flaw. President Obama and Congress did not frame it as a coherent response to the perverse incentives that cause our recurrent, intensifying financial crises. Wall Street CEOs rigged our structures to institutionalize perverse incentives. Refusing to change those structures after a catastrophe was, of course, significantly insane. President Obama and Congress failed to engage in a rigorous, honest investigation of those structural causes and then refused to fix the structural defects."

Well Tarullo is a lawyer too... i.e. nott qualified...

There can be no functional relationship between bank compensation practices and the value and/or composition of regulated bank assets ....

If there is can somebody please explain it to me?

Bob said...

Mortgage-backed securities. Were those quality investments? Perverse instruments?

Andrew Anderson said...

quite a few people have made that point. I.e. government debt in the hands of a central bank might just as well be scrumpled up and thrown on the fire. Ralph Musgrave

Sovereign debt is still useful for fiat sterilization purposes, if need be, though, of course, the yield should not be over 0%* to avoid welfare proportional to account balance, not need.

So yes, we still need sovereign debt but NOT with positive yields.

*And that's for the longest maturity sovereign debt - shorter maturities should have NEGATIVE yields with fiat account balances at the central bank (aka reserves in the case of banks) costing the most (negative interest).

Ralph Musgrave said...

Andrew,

I agree that something is needed for "fiat steralization" purposes from time to time. But that can (at least in principle) be done by the central bank just wading into the market and offering to borrow at above the going rate. And if that is not allowed under the law of any given country, there is no logical reason to the law cannot be changed. However, government debt serves equally well for the latter purpose, so we're arguing about nothing much here.

As to the rate of interest, the rate cannot be 0% (nominal) else why would anyone lock up their money in government (or central bank) debt? As to the best rate, certainly anything much above inflation is not desirable. Milton Friedman and Warren Mosler advocated no government debt at all. Personally I favor government debt, but keep the rate of interest below inflation, then government makes a profit at the expense of its creditors.

lastgreek said...

(Sorry.... talking about Greek's "revelation ")

But it was elegantly stated :)

Another Minsky reflection:

"During my last conversation with [...], in the summer of 1981, she was concerned with who would purchase the output of industry when manufacturing was carried on by "chips on chips." After I left, I found the answer I should have given her: everyone will work in advertising. If we look at the changes in the structure of employment in the United States, advertising, financial services and corporate bureaucracies are the leading sectors."

http://digitalcommons.bard.edu/cgi/viewcontent.cgi?ar ticle=1041&context=hm_archive

Andrew Anderson said...

As to the rate of interest, the rate cannot be 0% (nominal) else why would anyone lock up their money in government (or central bank) debt? Ralph Musgrave

Why indeed? Yet they already have in the case of Swiss and German sovereign debt, iirc. Go figure.

And the reason is that a small, predicable loss of principle beats an uncertain, possibly much greater loss of principle during an economic downturn.

So not only SHOULD yields and interest on inherently risk-free sovereign debt be NEGATIVE (or at most 0% for the longest maturity, e.g. for a 30 yr US Treasury Bond) they already HAVE BEEN.

That said, there should be a $250,000 or so individual citizen exemption at the central bank since some risk-free capital formation and liquidity is legitimate. Of course, this implies that citizens be allowed accounts at the central bank and not be forced to work through banks.



Andrew Anderson said...

Make that "principal", not "principle" though the latter has been sorely lacking wrt fiat and credit creation since at least the founding of the US.

Andrew Anderson said...

Of course physical fiat, aka "cash", allows negative interest to be circumvented so there needs to be restrictions on that too.