Friday, March 20, 2015

I'm Not Buying O'Malley on Wall Street Reform

It is clear that Gov. Martin O'Malley is trying to position himself with people like Sen. Elizabeth Warren and portray himself as a "populist Democrat." To do so, he wrote an op-ed in the Des Moines Register titled: Prevent Another Crash, Reform Wall Street. I'm sorry to say that all he's done is demonstrate that he doesn't understand what caused the financial crisis of 2008 or the Wall Street reforms that have already been enacted.

O'Malley suggests the need for two structural reforms: (1) reinstatement of the 1933 Glass-Steagall Act, and (2) break up the "too big to fail" banks.

In order to understand why those two reforms are unnecessary, we have to understand what happened to create the Great Recession of 2008. Financial institutions (some of which included commercial banks and some who didn't) made a lot of risky investments without the capital to back them up if those investments failed. When they did fail, it became necessary for taxpayers to bail them out or run the risk that the entire global economy would collapse.

Dodd/Frank did two things in regards to these large financial institutions:
  1. It gave a special council the ability to identify those who are "too big to fail" and label them "systemically important financial institutions" (SIFI). They are now required to maintain enough capital to survive the kind of market failures that led to the Great Recession. In order to ensure that happens, they must pass annual "stress tests" that are designed to replicate those conditions. 
  2. It gave the government "orderly liquidation authority" - or the legal right to seize complex financial institutions in times of crisis. This is something the government has had the ability to do with failing commercial banks since the Great Depression. Dodd/Frank ensured that, even if a SIFI were to fail, rather than have taxpayers bail them out, the government could take them into receivership.
I noted recently that, as a result of the capital requirements included in Dodd/Frank, the too big to fail institutions are already shrinking. Last week the Federal Reserve released the results of their stress tests on SIFI institutions and all U.S. banks passed (with an asterisk for Bank of America).

In light of all that, Gov. O'Malley needs to explain how Glass-Steagall and breaking up the "too big to fail" banks will improve things. My cynical self says he's playing on our anger at bailing out the banks 7 years ago and hoping we don't understand the success of Dodd/Frank in preventing it from happening again.

6 comments:

  1. Sigh. First, I don't know if it was just a typo, but Glass-Steagall was in 1933, not 1993. And yes, the 1999 provisions Clinton permitted caused us all to be linked to banks' horrid investments. These, once again, have been put in place. Now if they go down, they don't take us with them, precisely the goal of G-S in the first place. O'Malley should know that.

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    1. Sorry - did not see the wrong name was appended - it's Churchlady320 here.

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  2. Yeah, I was surprised by him saying that. He's hardly the first politician to pander to the base. It does help position himself as not-Clinton. We know those policies are unnecessary, but I can't tell you how many Dems still believe Glass-Steagall needs to be reinstated.

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    1. Glass and Steagall are dead. This matters because bills are named for their authors. You cannot revive a policy by an old name. The NEW name is "The Volcker Rule", a sub policy within Dodd-Frank. None of those men is dead, always good.

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    2. I don't disagree with you. This article is about O'Malley's comments, not the virtue of existing laws. He's pandering to the base and they lap that stuff up because it's what they believe. He's showing he shares their values, which is campaigning 101.

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