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Is Effective Financial Regulation Possible?

Wednesday, 16 January 2013 12:14 By Paul Jay, The Real News Network | Interview and Video

Gerald Epstein: Powerful lobbying by finance sector keeps turning regulations into Swiss cheese; there is an alternative if people fight for it.

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of the PERI report from Amherst, Massachusetts. And now joining us from Amherst is Gerald Epstein.

Gerry's codirector of the Political Economy Research Institute in Amherst. He's a professor of economics there. And he's published widely on a variety of economic issues, including central banking and international finance.

Thanks for joining us again, Gerry.

GERALD EPSTEIN, CODIRECTOR, PERI: Thanks, Paul.

JAY: So what have you been following this week?

EPSTEIN: Well, I've been following the continual swiss-cheesing of the financial regulation game here. As you know, after the financial crisis, all the financial regulators said, we're going to put up really strong regulations, tough enforcement, so that this doesn't happen again, so the banks don't fail and the taxpayers are left on the hook.

Well, this was six years ago when the financial crisis really started hitting, four years and a half since Lehman Brothers, and since that time there's just been one delay and problem after another. So this week we're looking at the so-called liquidity coverage ratio, which is a regulation to make the banks hold on to enough liquidity, enough cash, enough safe assets, so that if there's a run on the bank, they can sell those, get cash, and pay off depositors. This was the idea, so that banks don't go bankrupt and come after the taxpayers.

Well, what happened was the biggest banks lobbied very hard against tough regulations here and in Europe, and the Basel Committee last week came out with the liquidity coverage ratio regulations that were a total gift to the banking industry.

JAY: So what's next on this? I mean, is this then a done deal, that there won't be the tougher regulation?

EPSTEIN: Well, what they're going to do is—well, we know it's a big gift to the banking industry, because JPMorgan's bank stock immediately shot up about 6 percent. The European banks' stocks rose even more. What they did was instead of making the banks hold a lot of liquidity in really safe assets, they reduced the amount of liquidity that they're making the banks hold, and they're letting them count things like mortgage-backed securities, all kinds of securitized assets, triple-B rated securities, and count that as safe liquid assets. So it's really just a kind of a charade.

Similar things are happening in other realms of financial regulation. So, for example, there was a rule to make the banks push out their derivatives trading from the core banks and push them into subsidiaries that would be easier to let them just go bankrupt and taxpayers wouldn't have to bail them out. The banks fought hard against this rule. But the government had kept this rule against subsidiaries of foreign banks. Now the foreign banks are fighting hard to exempt themselves.

Something is similar happening with the Volcker Rule. The Volcker Rule was supposed to have been written and implemented by now. It's being delayed another several months at least.

So this is just going on and on and on.

JAY: So we're once again dealing with a situation where finance is simply so powerful you can't regulate it. I mean, every attempt to do this seems to wind up with sort of something kind of superficial that they can say, oh, we did it, but in substance it's not very serious. Is that not right?

EPSTEIN: That's correct. I think a lot of us were hoping—and, it turns out, incorrectly—that you could really put in some effective regulation that would be enforced. But what it's now looking like is that that's simply not going to be possible.

So I think the only solution, really, is a more extreme solution of actually breaking up the banks, making them be much smaller, so that as they continue to get into trouble and make their risky bets, we won't have to bail them out. And the fact of the matter is, most of the large banks really are not doing much that's contributing to real investment, to job creation. There wouldn't really be that much lost if the financial sector shrunk substantially and if we broke up the banks.

JAY: That's even tougher to pass, isn't it, than passing regulation.

EPSTEIN: It would be tougher to pass, but it's a clearer line. And I think rather than fighting in so much detail over every aspect of every rule, which is what we have been doing—and I think it was worth the fight, but rather than doing that, it's better to have a very clear line about breaking up the banks and pushing on that.

JAY: And what about—I mean, I'm not saying it'd be any easier to pass, but a proper public bank, so that, you know, whether they're big or small, let private banks go off and speculate if they want to, but have some alternative to that private banking system?

EPSTEIN: That's right. And as part of a reinvestment program, which the United States and European countries are going to eventually have to move toward, we will have to see much more public banking, development banking and so forth. And that can be part of an infrastructure bank, more policies to create smaller cooperative banks. That has to be the flipside of this coin.

JAY: Now, the thing is, even for the interests of the non-finance sector of the economy, you know, people involved in industry and retail and all the rest, I mean, you know, without some kind of regulation, there's simply no reason why there wouldn't be another crash as there was in '08. Aren't they concerned?

EPSTEIN: Well, this has been the ongoing puzzle of the whole political dynamic since the crisis started, which is why the nonfinancial firms have been so passive in this whole financial regulations fight.

Part of the answer, I think, is that a lot of at least the large financial firms have themselves become financialized, that is, that they make a lot of their profits from financial activities. And particularly, the high pay of their CEOs is tied to stock options and the financial speculation. So until that changes, you're not going to see a lot of the large non-financial corporations supporting strong financial regulation.

It's the medium-size and smaller-size firms, I think, that have to find a political vehicle for opposing the large banks. But the party system here in the U.S. between the Democrats and the Republicans is so divided right now, I think the political vehicle for them isn't clear at the moment.

JAY: Divided, but also both parties so beholden to the finance sector.

EPSTEIN: That's right. That's correct.

JAY: Yeah. Alright. Thanks very much for joining us, Gerry.

EPSTEIN: Thank you.

JAY: And thank you for joining us on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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Is Effective Financial Regulation Possible?

Wednesday, 16 January 2013 12:14 By Paul Jay, The Real News Network | Interview and Video

Gerald Epstein: Powerful lobbying by finance sector keeps turning regulations into Swiss cheese; there is an alternative if people fight for it.

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of the PERI report from Amherst, Massachusetts. And now joining us from Amherst is Gerald Epstein.

Gerry's codirector of the Political Economy Research Institute in Amherst. He's a professor of economics there. And he's published widely on a variety of economic issues, including central banking and international finance.

Thanks for joining us again, Gerry.

GERALD EPSTEIN, CODIRECTOR, PERI: Thanks, Paul.

JAY: So what have you been following this week?

EPSTEIN: Well, I've been following the continual swiss-cheesing of the financial regulation game here. As you know, after the financial crisis, all the financial regulators said, we're going to put up really strong regulations, tough enforcement, so that this doesn't happen again, so the banks don't fail and the taxpayers are left on the hook.

Well, this was six years ago when the financial crisis really started hitting, four years and a half since Lehman Brothers, and since that time there's just been one delay and problem after another. So this week we're looking at the so-called liquidity coverage ratio, which is a regulation to make the banks hold on to enough liquidity, enough cash, enough safe assets, so that if there's a run on the bank, they can sell those, get cash, and pay off depositors. This was the idea, so that banks don't go bankrupt and come after the taxpayers.

Well, what happened was the biggest banks lobbied very hard against tough regulations here and in Europe, and the Basel Committee last week came out with the liquidity coverage ratio regulations that were a total gift to the banking industry.

JAY: So what's next on this? I mean, is this then a done deal, that there won't be the tougher regulation?

EPSTEIN: Well, what they're going to do is—well, we know it's a big gift to the banking industry, because JPMorgan's bank stock immediately shot up about 6 percent. The European banks' stocks rose even more. What they did was instead of making the banks hold a lot of liquidity in really safe assets, they reduced the amount of liquidity that they're making the banks hold, and they're letting them count things like mortgage-backed securities, all kinds of securitized assets, triple-B rated securities, and count that as safe liquid assets. So it's really just a kind of a charade.

Similar things are happening in other realms of financial regulation. So, for example, there was a rule to make the banks push out their derivatives trading from the core banks and push them into subsidiaries that would be easier to let them just go bankrupt and taxpayers wouldn't have to bail them out. The banks fought hard against this rule. But the government had kept this rule against subsidiaries of foreign banks. Now the foreign banks are fighting hard to exempt themselves.

Something is similar happening with the Volcker Rule. The Volcker Rule was supposed to have been written and implemented by now. It's being delayed another several months at least.

So this is just going on and on and on.

JAY: So we're once again dealing with a situation where finance is simply so powerful you can't regulate it. I mean, every attempt to do this seems to wind up with sort of something kind of superficial that they can say, oh, we did it, but in substance it's not very serious. Is that not right?

EPSTEIN: That's correct. I think a lot of us were hoping—and, it turns out, incorrectly—that you could really put in some effective regulation that would be enforced. But what it's now looking like is that that's simply not going to be possible.

So I think the only solution, really, is a more extreme solution of actually breaking up the banks, making them be much smaller, so that as they continue to get into trouble and make their risky bets, we won't have to bail them out. And the fact of the matter is, most of the large banks really are not doing much that's contributing to real investment, to job creation. There wouldn't really be that much lost if the financial sector shrunk substantially and if we broke up the banks.

JAY: That's even tougher to pass, isn't it, than passing regulation.

EPSTEIN: It would be tougher to pass, but it's a clearer line. And I think rather than fighting in so much detail over every aspect of every rule, which is what we have been doing—and I think it was worth the fight, but rather than doing that, it's better to have a very clear line about breaking up the banks and pushing on that.

JAY: And what about—I mean, I'm not saying it'd be any easier to pass, but a proper public bank, so that, you know, whether they're big or small, let private banks go off and speculate if they want to, but have some alternative to that private banking system?

EPSTEIN: That's right. And as part of a reinvestment program, which the United States and European countries are going to eventually have to move toward, we will have to see much more public banking, development banking and so forth. And that can be part of an infrastructure bank, more policies to create smaller cooperative banks. That has to be the flipside of this coin.

JAY: Now, the thing is, even for the interests of the non-finance sector of the economy, you know, people involved in industry and retail and all the rest, I mean, you know, without some kind of regulation, there's simply no reason why there wouldn't be another crash as there was in '08. Aren't they concerned?

EPSTEIN: Well, this has been the ongoing puzzle of the whole political dynamic since the crisis started, which is why the nonfinancial firms have been so passive in this whole financial regulations fight.

Part of the answer, I think, is that a lot of at least the large financial firms have themselves become financialized, that is, that they make a lot of their profits from financial activities. And particularly, the high pay of their CEOs is tied to stock options and the financial speculation. So until that changes, you're not going to see a lot of the large non-financial corporations supporting strong financial regulation.

It's the medium-size and smaller-size firms, I think, that have to find a political vehicle for opposing the large banks. But the party system here in the U.S. between the Democrats and the Republicans is so divided right now, I think the political vehicle for them isn't clear at the moment.

JAY: Divided, but also both parties so beholden to the finance sector.

EPSTEIN: That's right. That's correct.

JAY: Yeah. Alright. Thanks very much for joining us, Gerry.

EPSTEIN: Thank you.

JAY: And thank you for joining us on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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