Friday Roundup, December 20th

  • Our Books essay this week is by Todd Zywicki on Nassim Taleb’s Antifragile: Things That Gain From Disorder. Zywicki applies Taleb’s insight that an antifragile “system . . . gains from disorder and volatility—i.e., exposure to stresses improves the operation of the system and makes it stronger,” to financial regulation, arguing this approach would lead to better results than the regulatory philosophy of Dodd-Frank.

Dodd-Frank: Adversarial Corporatism

Last week was the occasion of my first visit ever to Hillsdale College. Wow, was that impressive: it’s sheer bliss to encounter a horde of confident, smart, and serious kids.

The reason for my visit was a big campus event on Dodd-Frank; I was one of the invited speakers. The tape is here. It’s based on a manuscript I’m still noodling over. Here’s the gist of it:

Conservative-libertarians mope about Dodd-Frank’s subsidies to big financial institutions. They also mope about the feds’ civil and criminal prosecutions of financial institutions—like, J.P. Morgan. My view is that these things are of a piece. As David Skeel (who also spoke at the Hillsdale gig) has explained in a very fine book, Dodd-Frank cements a symbiotic, “corporatist” partnership between the government and the big banks. Wall Street lives with de facto bailout guarantees and other embedded subsidies. That’s the quid; what’s the pro quo?

Answer, the government gets to siphon off a big chunk of the profits (in the case of Fannie and Freddie, all of the profits), chiefly by means of “law enforcement” (see, e.g., the $13 billion settlement in the works between JPM and DoJ). The SEC, the CFTC, the Fed, the FHA—they’ve all become profit centers for a cash-starved Congress. That’s the essence of adversarial corporatism: the bankers get to make a boatload of money, and the government gets to treat them like a criminal class. Whether these people have actually done something wrong is secondary, if not wholly irrelevant. With Wall Street’s capable assistance, government has managed to institutionalize and monetize the perp walk.

Is this a great country, or what?

No Reason, No Benefits: Dodd-Frank in Action                                                                                           Or: The Insanity Plea in Administrative Law

Finally! After a mere two years, the SEC has managed to propose a long-awaited rule to implement Section 953(b) of the Dodd-Frank Act. If you have the patience to wade through it, you’ll get a small but powerful illustration of the stupendous idiocy of the entire enterprise, and of the inability of our legal system to handle it.

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Cull Your Clients

Hillsdale College has kindly invited me to deliver a talk on Dodd-Frank and its aftermath (November 4–I’ll post a transcript afterwards). An early draft of that speech imagines a dystopia in which government produces sheepish obedience not with storm troopers or a propaganda apparatus but through nominally private banks. I’m glad I discarded that draft—not because it’s paranoid, but because it’s, like, so yesterday.

“J.P. Morgan to Cull Business Clients,” today’s Wall Street Journal informs us. “Bank Reviews Cutbacks in Loans to Pawn Shops, Payday Firms, Others Viewed as Risky to Reputation,” reads the subhead. As for pawn shops and payday firms, no big surprise: the policy of Dodd-Frank is to present consumers with a choice between government-controlled SIFIs and the Cosa Nostra, by mowing down every lender in-between. But what “Others”? “The bank has also ramped up discussions whether it should keep lending to gun companies,” says the article. “[N]o policy has been put in place prohibiting loans to those companies,” we are being told: “So far.”

Also on J.P. Morgan’s client questionnaire:

Are you now, or have you ever been, a member of an organization that promotes sexual abuse, especially the Catholic Church?

If you are a government borrower: is your state/county in full compliance with the Affordable Care Act?

Does your organization/firm/government respect the full dignity and sanctity of gay marriage?

I’m making this up—so far. Come November, it may be old news.

Yes, dear libertarians: J.P. Morgan’s “risky” customers can migrate elsewhere—in your fantasy world. In the actual world, J.P. Morgan’s only real client, and that of any bank of any size, is the government, and every one of them is angling for a first-mover advantage. In completely unrelated news, J.P. Morgan’s commercial banking unit reported 1.73 billion second-quarter revenues.

“It isn’t known if regulators played any role in urging J.P Morgan to examine its relationships” with “risky” clients, the Journal’s intrepid investigators report. They’re missing the point. A mafia don picks up the phone or sends guys with baseball bats to “urge” people to “examine their relationships” and to “cull clients” only when he fears the system might break down. When it works he just sits there, gets a shave, and collects the money. Kind of like the SEC or the Fed, with a vowel at the end.

There comes a point at which you want to send money to Ted Cruz, not to improve things (he can’t and he knows it) but simply to bring the system down. I’m not quite there yet, but I’m getting close.

Financing Failure: A Century of Bailouts

Financing Failure
Play

So we were told with the passage of the Dodd-Frank Act that too big to fail was now behind us. Except it isn’t. In fact, the conditions supporting bank bailouts have only gotten worse with the nation’s largest banks actually increasing in size and scope since 2008. TBTF, however, goes back farther than you might think. This podcast with Vern McKinley on his book, Financing Failure, discusses the regulatory history of bank bailouts rather than winding down insolvent institutions. Contrary to the Hank Paulson and Ben Bernanke narrative of the 2008 crisis, although the scope of the problem was new, the subject matter of the problems faced by regulators was anything but unique. McKinley provides this account in interesting detail and considers our future under Dodd-Frank.

When Government Goes Into Business

The sequester is kicking in, and the consequences are upon us: airplanes are falling out of the sky, furloughed FBI agents commiserate over donuts, sea levels keep rising. Help, however, is on the way. Increasingly, federal agencies are funding themselves from sources other than appropriations. Not a few have turned into profit centers for the Congress.

Just last week, the Federal Reserve proposed a fee schedule for its banking oversight “services,” pursuant to section 318 of Dodd-Frank and to the tune of $440 million. (That’s what the exercise supposedly costs the government. What it costs the banks and the economy, no one knows.) Not everyone is happy with the NPR—see here.

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Policy-Based Evidence-Making at the Consumer Financial Protection Bureau

New mortgage rules released by the CFPB show why heightened oversight is necessary.

The BadgeThe Consumer Financial Protection Bureau is one of the most powerful and least accountable regulatory agencies in American history.  Immune from budgetary oversight by Congress and headed by a single director who cannot be removed by the President, the agency wields unconstrained, vaguely-defined powers to regulate virtually every consumer and small business credit product in America.  The Bureau has defended its extraordinary independence by claiming that its regulations will be “evidence-based” on unbiased, unimpeachable economic evidence, and thus is above the usual political concerns that justify bipartisan commissions and engaged congressional oversight.

The Rules

Last week’s issuance of its new rules on residential mortgages (summarized here), however, shows why the new regulator can’t be trusted to regulate itself. The rules impose new burdens on lenders to ensure borrowers’ “ability to pay” their loans and create a safe harbor for so-called “qualified mortgages” that are perceived as especially safe by regulators, such as fixed rate mortgages and—don’t laugh—loans issued according to Fannie Mae and Freddie Mac’s underwriting criteria. 

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Friday Roundup, January 4th

Two major misconceptions entertained by the opposing parties of the period are laid to rest. One was held by the Soviet leaders, the other by Western politicians. On the Soviet side there was the strongly held and ideologically conditioned belief, or rather, delusion, that the October Revolution will be followed by similar uprisings in Western European countries inspired by the Soviet example and that these more advanced countries (especially Germany) will provide much needed economic assistance and moral support to the young Soviet state. More than that, the Soviet revolutionary leaders “believed that their revolution would expire if it stayed in one country alone…”

On the Western side, prominent politicians and military men could not bring themselves to believe that the seemingly disorganized and poverty-ridden Soviet state could survive. As Service wrote “no realistic calculus of military power in Europe favored the Bolsheviks after the October Revolution… When the communists…took power in Petrograd, they could not be certain that their government would last more than a few days.” [3]     Arguably the implicit thesis of the book is that neither the birth nor the survival of the Soviet system was predetermined.

  • Hester Peirce writes at Point of Law on the federal government’s continued entanglement with credit rating agencies via Dodd-Frank, which, apparently, urges the SEC to create a new government credit rating bureaucracy. Can’t wait. But there is more to come from Dodd-Frank (the gift that keeps giving) and Peirce provides @Real Clear Policy a list of the top 10 Dodd-Frank rules to watch for in 2013.
  • Don’t miss the Fed-Soc’s SCOTUScast with Richard Epstein on Arkansas Game and Fish Commission v. United States. Our own Mike Rappaport has commented on this case here.

Wanted: Long-Term Rules for the Short-Sighted Fed

The Cato Journal’s Spring/Summer 2012 volume on “Monetary Reform in the Wake of Crisis” is not to be missed. Contributors include Allan Meltzer, John Allison, James Grant, George Selgin, and Judy Shelton, among others. You could think that so much has transpired since this went to print, more QE, more EU summits, more “Fed twists” that its value has decreased. Not so, however.

For example, Allan Meltzer, author of the magisterial history of the Fed entitled A History of the Federal Reserve, has an essay “Federal Reserve Policy in the Great Recession” that is chock full with insight on the Fed’s behavior of recent years. The essay also limns a way forward to a rule-driven, discretion-limited Fed. The main theme is that “Overresponse to short-run events and neglect of longer-term consequences of its actions is one of the main errors that the Federal Reserve makes repeatedly.” Meltzer charges that the Fed in the Great Recession has engaged in credit allocation and distorted credit markets, incurred an unprecedented volume of long-term assets, evaded the dual-term mandate, engaged in debt management, among other acts. In so doing, the Fed has done things “that are not the responsibility of a central bank.”

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Run Government Like Business

Drove the kids to school this morning and now, there are bite marks in the steering wheel—not on account of anything they did, but courtesy of my listening in on an NPR interview with outgoing SEC Chair Mary Shapiro. While gushing about the SEC’s fabulous post-Dodd-Frank rules (the handful that haven’t been gunned down by federal courts, and wouldn’t you know the SEC is now regulating hedge funds—the only outfits that had absolutely nothing, nada, zippo to do with the financial crisis and now, do you feel safe??) Madam Chair complained that the SEC, alone among federal financial agencies, is still not “self-funding.”

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