Rachel Maddow talks to Paul Krugman about the financial reform bill and what may or may not work that's in it to reign in Wall Street and eliminate the risks to the economy in the financial system. Krugman has some harsh words for Republicans when Rachel asks him "how has the Republican Party been making either criticisms to the existing bill or proposals for what they would do instead that make sense to you as an economist?"
Krugman: No, I mean it's, well first of all it's obvious they're actually huddling with the bankers, huddling with Wall Street to figure out way to stop this thing and then proclaiming that what they're doing is really preventing future bailouts of Wall Street. But no, there has been nothing there. There's been no proposal. The only thing they've been doing is claiming that resolution authority is just setting you up for future bailouts, we should just promise not to have future bailouts.
Now as I've written that's like saying we have solved the problem of fires by abolishing the fire department and then people will know that their buildings will burn down, so they won't let that happen. It's just not a coherent... it's a dangerous idea if anything.
Here's an illustration from one of Paul's posts at the NYT's making that exact point. Ezra Klein said the Democrats should be calling it "execution capacity".
The New Yorker Explains Resolution Authority
More on that from Krugman here -- The Fire Next Time.
Maddow and Krugman also discussed another one of his op-eds earlier in the interview -- Six Doctrines in Search of a Policy Regime:
Health reform, for all the complexities of its details, was a pretty clear issue; there was almost a theorem-theorem-lemma feel to figuring out what had to be done, leading you to something like the actual reform we got. Yes, there should have been a public option. But the basic structure of the issue was clear.
Financial reform is a much messier debate. It doesn’t break down simply on some left-right axis, although that’s there too. Instead, there are a bunch of competing views of what the problem is all about. In fact, by my count there are six such views. They’re not all mutually exclusive, but it matters which of the six you place at the top of the list.
Now, I have a personal opinion: basically, I believe in view #2, with some allowance for #3 and #4 too. But before I defend my version, let me lay out the list of candidates for explaining the mess we’re in. Later on, I’ll also describe three visions of financial reform, again along with my personal preference.
So: what’s the problem? Here are the views I see out there.
- Size: Our largest financial institutions have just gotten too big
- Shadows: The rise of shadow banking, institutions that fulfill banking functions but evade the regulatory regime, has undermined stability
- Opacity: We’ve come to rely on complex financial instruments that neither regulators nor the private sector
- Predation: Financial firms deliberately misled consumers and investors
- Government intervention: Public policy pushed lenders into making bad loans, especially to the poor
- Monetary mismanagement: The Fed did it by keeping interest rates too low for too long, and/or policymakers panicked in 2008 and spooked the markets
but once upon a time the Wall Street investment banks used to collectively self-insure against financial calamities, without reliance upon taxpayer largesse for bail-outs. But when Glass-Steagall was ended, a paradigm shift occurred with our TBTF banks. They adopted a totally insane fractional reserve ratio that exceeded 100 to 1, having gotten assurances from the NY Fed (IMHO) that private "off-the-books" loans drawn from taxpayer funds would be made available in an emergency.
The Federal Reserve is in dire need of a full and publicly disclosed (open government?) audit. Without such an audit, as a precursor to parallel regulatory and criminal investigations, the USA's current "economic bubbles" fiscal structure will continue, to the long term detriment of this country. In fact, bold progressive action should be seeking to dismantle the Federal Reserve as this country's private for-profit central bank.
A far better financial outcome may be obtained with a confederation of 50 public not-for-profit State Banks under the auspices of a Central regulatory body that answers to the US Treasury. In other words, put control of this country's economic well-being in the hands of the US Congress and the States legislatures, instead of greedy private for-profit bankers acting in their own self-interest.
Of course, stricter regulation of banking fractional reserves would go a long way toward long term stability of the USA banking system, just so long as the growth of money supply were sufficient to stimulate rational economic growth. One may look no further than the Canadian banking system which, although closely tied to USA financial interests, saw no financial meltdown due in large part to their maintaining narrower fractional reserve ratios, as well as better regulatory oversight.
If some long-term economic policies along these lines are not diligently pursued, the fact that the USA's economy is a "house of cards" will become apparent in repeated fiscal crises, to the sole benefit of the private for-profit financial institutions ...
"Those who make peaceful revolution impossible will make violent revolution inevitable."
-- John F. Kennedy
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