Financial Reform Freak Outs

 |  Includes: IYF, KBE, KRE
by: Rortybomb

Over the weekend, Kevin Drum joined those who have had the “seriously? This is all we are going to do in response to the largest financial crisis in 80 years!?” freak-out moment. (I’ve had several. Trust me, I’ve had several.)

The realization, and I’ve reflected on this a lot, is that we are rebuilding the 2007 financial sector with some additional legal powers for regulators to exercise in the middle-of-the-next financial crisis. I encourage Kevin, when he’s in a safe place, to reflect on it from the point of view of the biggest players, if they had survived.

(click to enlarge)

Over the next few years your major competitors in the regionals are going to be crushed by the wave of CRL losses, while the government is never going to touch your second-lien exposures, furthering that concentration. We’ll see what happens with derivatives, and I am rooting for the Lincoln Bill to survive. Maybe we’ll actually get involved with suing the banks for fraud. There’s still some hope out there. But it’s very likely you’ll look at it all and think things are pretty much OK.

A few additional things:

1) Break up the largest banks in addition to the current bill. Forget feasibility. Once you stand back and realize that structural change is necessary in addition to the prudential regulation stuff, the whole things feels better. It’ll probably lose – but what a good idea to lose on.

Because it is right. The concentration is from non-existent anti-trust law over the past few decades. There’s no advantage to them that anyone can quantify.

2) The new status quo will be even worse. Listen for allusions to the Canadian banking sector. It’s a poor analogy, first off. But it also involves an even higher level of, as Steve Randy Waldman horrified me a little over a year ago by pointing out, the largest parts of the financial sector shaking hands with the government in a way that should scare us. What will the percent of the corporate profits that go to finance look like in 2014?

3) In some ways it’s a very exciting time to be thinking about financial reform. I’m thinking about Dean Baker’s financial transaction tax, Zephyr Teachout’s new financial anti-trust law, Jane D’Arista new financial regulatory infrastructure, Waldman-ian delinking of FDIC insurance, and a ton of other things. So is the Right, thinking through CDS as a resolution mechanism. We could do all this now, especially a financial transaction tax or a really serious tax on liabilities. But most of this will have to wait until the next financial crisis to come under serious discussion again, but hopefully we’ll be ready this next time, and sadly the doom loop might amplify to the point where we have to take more serious action. I wish we could sail this reform into the sunset, but most of the major players say that a financial crisis every 6-10 years is the new normal.

And our last financial crisis was already 2 years ago.