Paul Krugman has a poorly argued column today setting up straw men to argue his case for regulation.
This is pretty egregious:
Even among those who really do want reform, however, there’s a major debate about what’s really essential. One side — exemplified by Paul Volcker, the redoubtable former Federal Reserve chairman — sees limiting the size and scope of the biggest banks as the core issue in reform. The other side — a group that includes yours truly — disagrees, and argues that the important thing is to regulate what banks do, not how big they get.
Of course, that’s untrue. The “side” exemplified by Volcker wants not only to end too big to fail, but also to regulate what banks do. This is not complicated or obscure.
Since Krugman singles out Volcker, let’s look at the proposal so identified with the ex-Fed chairman that the president called it the Volcker Rule. What is it, besides limits on size?
The proposal, dubbed the “Volcker rule” after former Federal Reserve Chairman Paul Volcker, would have essentially prevented any commercial bank with federally insured deposits from owning a division that makes speculative bets with its own capital.
If that’s not regulating what banks do then I don’t know what is.
But Krugman, who has been defending the too-big-to-fail banks for a while now, isn’t done with the straw (emphasis mine):
The solution, say people like Mr. Volcker, is to break big financial institutions into units that aren’t too big to fail, making future bailouts unnecessary and restoring market discipline.
That’s just not true. Ending too big to fail is a component of the bid to try to end bailouts and reinstate real markets. No one on the anti-TBTF side (which you might have noticed includes me) thinks breaking up the banks is a silver bullet. Would “people like Mr. Volcker” include folks like Simon Johnson? Does Paul Krugman really think these people don’t believe in wholesale regulatory reform?
Want to know what these folks—the anti-TBTFers— really think? Go take a look at Barry Ritholtz’s ideas from last week, which include regulating derivatives, reforming the ratings agencies, regulating the shadow-banking system, limiting bank leverage, and reforming compensation. Oh yeah, and ending too big to fail.
Krugman's a smart guy, it's unfortunate he's so combative and hyper-partisan. He pulls the sane tricks when talking about the conservatives he demonizes. Maybe it's time he told his wife to lay off his posts?
Regulating all this is a enormous challenge. Even if congress and Obama can get it right (which I sincerely doubt), unless its paired with a coordinated international legislation it will just send all those traders and derivatives overseas. The whole thrust of modern finance is to find loopholes and arbitrage opportunities.
#1 Posted by JLD, CJR on Sat 3 Apr 2010 at 01:26 AM
JLD, you don't know what you're talking about.
To Ryan, what I think Krugman is attacking here is not Paul Volcker's interpretation of the Volcker rule, but the Obama administration's interpretation. What they don't want to be is the bag holder, check picker upper of these big companies that are too big to die, but they have people in the administration who loath the idea of doing anything about it.
Volcker wants to implement separations of bank operations and impose leverage limits and restrict activities that are dangerous and have full disclosure, but the Washington / Wallstreet people want to remain hands off.
http://www.economist.com/displaystory.cfm?story_id=15374543
"The administration had until now seemed content to shackle the banks with tougher regulation, including higher capital ratios, rather than breaking them up or limiting what they could do."
That's the Larry Summers, Tim Geinther, Rahm Emmanuel, Wall Street lobby influence, and that influence will continue to be a problem when the administration starts to put forth "the Volcker Rule" with its weak interpretation of what it means.
We've already seen what has happened to strong proposals made weak by this crew with the Elizabeth Warren Financial Products Safety Commission.
Supported by Barack Obama, but only in its weakest interpretation.
I think what Paul is trying to focus the conversation on is that the size doesn't matter. The size of the titanic didn't sink the ship, it was the iceberg they were heading towards that did it. If you define the banking system into discrete parts with functions that are easily understood, you get a boring banking system.
It's stable. It's predictable. It isn't going to sink. It's also not going to be able to charge vast rents based on complicated proprietary knowledge that only the specialists possess. Regulating behavior is a better approach to the bailout problem than regulating size since a) small pieces can pose systemic risk if they follow the herd of the cliff while it's profitable b) companies have tools to mask their size and risk.
http://www.cnn.com/2010/HEALTH/04/02/pfizer.bextra/index.html
Unless you ban certain actors from certain behavoirs, the financial system will be too arcane to regulate or trust. Knowing Obama, that problem isn't going to be faced in a real way.
At least that's my interpretation of what Paul was getting at. Am I way off?
#2 Posted by Thimbles, CJR on Sat 3 Apr 2010 at 07:33 PM
Speaking of Simon Johnson, he's talking about a man who will have vast influence on how Volcker Rule and financial regulation will take shape
http://www.huffingtonpost.com/simon-johnson/jamie-dimon-the-most-dang_b_524170.html
Jamie Dimon was once known as Obama's favorite banker.
http://www.nytimes.com/2009/07/19/business/19dimon.html
And he doesn't want to shrink his bank at all.
#3 Posted by Thimbles, CJR on Sat 3 Apr 2010 at 07:52 PM
It's truly unfortunate that Paul Krugman's straw men are not too big to fail. Meanwhile, he has a captive audience of "yes yes Dr Krugman" dittoheads to spread his message.
At least there is healthy opposition to his position. http://www.jrdeputyaccountant.com/2010/03/taking-baseball-bat-to-paul-krugman.html
#4 Posted by Jr Deputy Accountant, CJR on Sat 3 Apr 2010 at 08:13 PM
How about I take a baseball bat to you and call that healthy opposition? How does that sound to you?
#5 Posted by Thimbles, CJR on Sat 3 Apr 2010 at 08:20 PM
I think you're being unfair here. Krugman clearly says "core" issue, not the "only" issue. It strikes me that he sounds an awful lot like the professor he is, trying to reduce the argument to its salient points. Simple? Sure. Overly simple? Probably not.
This is how most of his blog entries go too.
#6 Posted by John, CJR on Mon 5 Apr 2010 at 06:53 PM
I don't think so, John.
Krugman is distorting what the anti-TBTF folks think--setting up a straw man, as I said. No one seriously thinks that breaking up the banks is the "important" thing--the "solution"--as opposed to part of a comprehensive reform plan. You can't simplify somebody's position to the point of misleading about it just to make a professorly point.
#7 Posted by Ryan Chittum, CJR on Mon 5 Apr 2010 at 09:57 PM
Government does nothing well; it does not regulate well. That's because central control can never have as much information as is in the free market.
Look at the unintended consequences of government bungling. To stop pension fund failures, ERISA in 1974 mandated "prudent" investing, defined as investment grade ratings. By whom? By newly entrenched rating agencies. This gave the NRSRO unwarranted power, with a profit motive but without accountability.
Bad consequence one - stupid investing. Bad consequence two - bright line between investment and speculative bonds, which fueled the CDO process. Yes, ERISA ratings mandate drove the bond price arb that let bankers package and resell junk while taking money off of the table.
That is "iatrogenic disease" at its finest.
The only thing government can do is to ensure the presmises of free markets: many small, independent agents; free flow of information; no subsidies, barriers or distortions; no monopolies; and as we have learned to our dismay, no TBTF.
It is willful folly to think we can allow TBTF and somehow "regulate" them. The only solution is market discipline.
Yes protect depositors, and have the FDIC continue to regulate.
But SEC, OCC, OTS, Fed? Useless.
#8 Posted by Robert Arvanitis, CJR on Tue 6 Apr 2010 at 12:52 PM
It would appear the government is taking advantage of the "crisis" to implement controls over the banks they would never be able to sneak past us in normal times. It is important to know the banks did not cause this problem. This was a result of congress passing laws requiring easy loans and authorizing Fannie Mae and Freddie Mac to make bad loans. Once these loans were made and completely insured with the full faith and credit of the United States they were then sold to the banks as good investments. The banks resold these loans and many different people and funds and investments bought them. The fault for the defaults lies 100% with Barny Frank, Chris Dodd and far left members of congress who forced this on us.
#9 Posted by gonewiththewind, CJR on Tue 6 Apr 2010 at 08:43 PM
., it was a nice txt of the writer
#10 Posted by jojo, CJR on Thu 29 Jul 2010 at 06:49 AM
you said..
"Krugman is distorting what the anti-TBTF folks think--setting up a straw man, as I said. No one seriously thinks that breaking up the banks is the "important" thing--the "solution"--as opposed to part of a comprehensive reform plan. You can't simplify somebody's position to the point of misleading about it just to make a professorly point."
Funny... that's what you just did to Dr. Krugman.
He states "SIZE AND SCOPE [emphasis mine] of the biggest banks as the core issue in reform" making his point that size is immaterial. He clearly states it and you misread, misunderstood or just plain ignored it.
#11 Posted by Ed, CJR on Sun 24 Apr 2011 at 10:33 AM
This is really sad. Is "size and scope" the CORE issue for the Too Big To Fail side or not (really, the TBTF phrase gives it away).
CORE issue != ONLY issue.
You are misinterpreting Krugman's claim, and then calling your misinterpretation a straw man.
#12 Posted by addicted, CJR on Mon 15 Aug 2011 at 02:53 AM