Economics of Contempt

I'm going to push back against this post from Mike Konczal, which is heavy on the rhetoric:

[W]henever [Treasury] got involved with Congress, they pushed for less structural reforms. They pushed for the solution that embraced the status quo with arms wide open.

Treasury against Progressives on FinReg

Examples? Off the top of my head, ones with a paper trail: They fought the Collins amendment for quality of bank capital, fought leverage requirements like a 15-to-1 cap, fought prefunding the resolution mechanism, fought Section 716 spinning out swap desks, removed foreign exchange swaps and introduced end user exemption from derivative language between the Obama white paper and the House Bill, believed they could have gotten the SAFE Banking Amendment to break up the banks but didn’t try, pushed against the full Audit the Fed and encouraged the Scott Brown deal.

You can agree or disagree with any number of those items, think they are brilliant or dumb, reasonable or a pipe dream. But what is worth noting is that they always end up leaving their fingerprints on the side of less structural reform and in favor of the status quo on Wall Street. These are some of the many ideas that progressives brought to the table, and there’s a documentable trail of each one of them being opposed and fought against by the administration.

This is not to say that the administration is against reform. But it is to say that the problem I see is that they think we had was a crisis where regulators didn’t have enough powers, not that the financial sector in 2007 was too dangerous and too risky.

This meme bothers me, primarily because there's so little evidence to support it. Saying that Treasury doesn't think "the financial sector in 2007 was too dangerous and too risky" is just false, and deeply unfair to Treasury. There's no evidence whatsoever for that assertion, and mountains of evidence to the contrary. Moreover, we did have a crisis where regulators didn't have enough powers. For one, regulators didn't have the authority to resolve a large nonbank financial institution (this is indisputable), and that was a massive problem which made the crisis significantly worse. Was this the only problem? Of course not. But Treasury never said that, and imputing that view to them is pretty disingenuous. It's a complete straw man, but useful for the progressive meme in which Treasury was opposed to Real Reforms (a.k.a., progressives' preferred reforms).

A quick look at Konczal's list of examples shows just how strained this meme is. Of the 9 examples he provides, only 2 of them are actually "structural reforms" — Section 716 and the SAFE Banking Amendment (cap on bank size). The rest of Konczal's examples are just issues he happened to disagree with Treasury on.

Whether FX swaps and forwards will continue to be exempt or not isn't even close to a structural reform. Nor is the end-user exemption, which only affects a very small percentage of swap transactions. And the argument over the end-user exemption was about the scope of the exemption — again, hardly a structural issue.

Encouraging conferees to take the Scott Brown deal isn't even a substantive issue, so calling that an example of Treasury opposing structural reforms is comical. (Especially since the Volcker Rule wasn't progressives' idea; it was the administration's idea.) The "full Audit the Fed" proposal was still just an audit, so again — not even remotely structural.

Treasury opposed the Collins amendment because they prefer to let regulators negotiate internationally-consistent capital requirements, not because they somehow oppose higher capital requirements for big banks. Higher capital requirements for Tier 1 FHCs has been one of the centerpieces of Treasury's plan from the very beginning (see the June 2009 white paper) so don't even try to claim that Treasury's opposition to the Collins amendment shows that they oppose higher capital requirements for big banks. Not gonna fly. On the trust-preferred securities issue, the Basel III consultation already eliminates TruPS from Tier 1 capital (and they're quantitatively limited in Basel II), so that wasn't the issue. Treasury's opposition was about process, not substance — which is why Treasury's Michael Barr said, "We 100% share the goal of the Collins amendment." Same goes for the leverage requirements — Treasury's opposition was about process, as the Basel Committee is in the process of introducing the first international leverage requirement.

Finally, pre-funding vs. post-funding the resolution mechanism isn't a structural issue. The money for the resolution mechanism was always going to come from large financial institutions (>$50bn in assets), it was just a matter of whether they paid a portion of the cost upfront and the rest ex post, or paid the entire amount ex post.

So in reality, there were only 2 actual "structural reforms" that Treasury opposed: Section 716 and a cap on bank size. That Section 716 was a bad idea is at this point common knowledge. Treasury was right to oppose it, and I doubt even Konczal would argue that point. Capping bank size, while not quite as ridiculous as 716, was still a silly idea. The main sponsors of the idea were progressives, but by no means did it command the support of all progressives — Paul Krugman, for one, loudly opposed the idea.

So in the end, Treasury opposed the two progressive-backed structural reforms that they should have opposed, and fought for (and won) several very valuable structural reforms — e.g., CFPA, resolution authority, derivatives clearing. Somehow, though, this amounts to being "in favor of the status quo on Wall Street." Go figure.

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On a related note, I was obviously less impressed with progressives during the financial reform debate than Konczal was. Progressives were, for example, aggressive purveyors of misinformation on Section 716. It was also progressives who pushed lawmakers to oppose a fictitious derivatives loophole. And they got their wish — Sen. Cantwell voted against cloture because of the fictitious loophole, handing Scott Brown an enormous amount of bargaining power as the 60th and decisive vote. Cantwell now says that she'll vote for the conference report — after CFTC Chair Gary Gensler sent her a letter explaining the derivatives loophole (non)issue — but this comes after all the negotiating took place. Had Cantwell been on board during the conference committee, the Dems wouldn't have needed Scott Brown's vote, and could have ended up with a stronger Volcker Rule. And it's largely progressives' fault that this happened — it was their either reckless or dishonest advocacy that convinced Cantwell to oppose the bill, which allowed Scott Brown to extract significant concessions in conference and personally nix the $19bn bank fee. Awesome.

Did progressives do some good work in the financial reform debate? No doubt. But they were far from the Forces of Light they seem to think they were.