Dean Baker: in reality, it's the failure of financial reform

In his Guardian column, Dean Baker observes in his usual understated tones that financial regulators are simply not up to the task of overseeing the large, global financial institutions and that financial reform since the beginning of the financial crisis is inadequate.

He suggests that what is needed to fix this situation is for citizens to pressure their policy makers so that the policy makers adopt legislation that breaks up these Too Big to Fail institutions.

Regular readers know that your humble blogger prefers a much simpler solution that doesn't require policy makers to adopt new legislation over the objections of the banking industry.  I would like to see our policy makers pressure financial regulators to simply use the laws on the books.

During the 1930s, Congress adopted the securities laws that require that market participants be provided with access to all the useful, relevant information in an appropriate, timely manner so they could independently assess this information and make a fully informed investment decision [note: similar laws have been adopted in Europe and Japan].

For banks, all the useful, relevant information in an appropriate, timely manner is defined by ultra transparency under which the banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

This definition of what constitutes all the useful, relevant information is an appropriate, timely manner is not just mine.  At the time the securities laws were passed, it was also the definition used by the banking industry.  

The banking industry use to see a bank disclosing all its exposure details as a bank that could stand on its own two feet as it had nothing to hide.  I realize that the current banking industry doesn't believe this and will push back against the regulators because they prefer to hide their true risk.

So let me offer a compromise:  only banks that have government insured deposits need to provide ultra transparency.

There is no legitimate business reason why a bank that benefits from having the taxpayers guarantee their deposits should be allowed to hide the risks that it is taking.

My compromise gives all banks a choice:  keep their insured deposits and provide ultra transparency or get rid of their insured deposits and continue to hide behind the veil of opacity of current disclosure requirements.

JP Morgan is a huge bank and can swallow $6bn in losses, but the incident showed as clearly as possible that the Dodd-Frank reforms are not working. The London Whale's losing trades were all done in the Dodd-Frank era. The bill's provisions did not prevent JP Morgan from making massive bets and misleading regulators about their nature and the risks involved. 

If the regulators were not able to catch the London Whale's huge gambles before they went bad, why would we think that they will catch the next crapshoot from the Wall Street gang? 

It's time that we looked at this seriously: the regulators lack either the will or the competence to rein in the big banks. 

The big banks are going to get away with everything they want, regardless of the provisions of Dodd-Frank. 

If the big banks are too big to regulate and, according to Attorney General Holder, too big to prosecute, then the only sensible course is to break them up.... 

Or simply require them to provide ultra transparency if they are to have access to deposit insurance.

At the top of the list is Elizabeth Warren's election to the senate. Senator Warren has already made it clear that she will use her seat on the Senate banking committee to try to hold the banks and bank regulators accountable. The other important development is that Warren seems to have an ally in Louisiana Senator David Vitter. 

At first glance, this might seem an unlikely alliance. Warren is clearly on the left side of the Democratic party and Vitter is to the right of center of a very conservative Republican party. But Vitter, apparently, takes his belief in the market seriously enough ...

Disclosure is not a Democrat or Republican issue.  Disclosure is the necessary condition for the invisible hand of the market to operate properly.

The point is straightforward: if a bank's creditors know that the government will cover its losses, the bank is gambling with the taxpayers' money, not its own.... 

Hence my compromise: if the government will cover a bank's losses, then the bank must provide ultra transparency.  Transparency ends the bank's gambling with the taxpayer's money.

As it stands, the leadership of both parties is too closely tied to the financial sector to take any steps that fundamentally threaten their interests. 

This has nothing to do with political philosophy: the leadership of both parties is owned by the financial industry. 

However, if the outsiders in both parties can build up enough popular outrage over Wall Street's shenanigans, the party leadership will follow.

All that is required is that enough pressure be applied so that regulators use the laws on the books.