Terrific question from Mary Bottari. Everyone says they believe in higher capital requirements– even bankers– but so far, all of the negotiations regarding new capital requirements are leading to very small adjustments, rather than significant changes. The higher a bank’s capital requirements, the less it can gamble with borrowed money, and the greater it’s cushion against losses. Lehman Brothers had a Tier 1 capital ratio of 11 percent right before it filed for bankruptcy, and that wasn’t enough– right now the international negotiations are leading towards a consensus of . . . 11 percent.
Radical right-winger Eugene Fama wants 40 percent to 50 percent capital requirements for banks. Simon Johnson says 20 percent to 25 percent capital requirements are acceptable, provided the biggest banks are broken up.
Robert Johnson: “The two things that blow out the debt-to- GDP are financial crises and wars.” So being a deficit hawk means being a financial reform hawk and an anti-war advocate.
Good question from Bob Kuttner. Teddy Roosevelt was kind of a radical fluke– he only came to power because McKinley was assassinated. Obama has not supported serious financial reform– how can progressives talk about moving progressive policy when the administration simply will not lead?
Simon sez: So what? Progressives worked for decades to change the consensus and create new ideas about how big business should operate. When somebody like Teddy Roosevelt did come to power, those ideas were not mainstream, but they were out there, and Roosevelt was able to deploy them in public policy.
We can’t make the president a progressive, but we can create the groundwork for a progressive president to take advantage of. There is very bad news for Democrats here– Roosevelt was a progressive, but he was also a Republican, and his reformist domestic agenda made him wildly popular. If Democrats don’t seize the mantle of reform, somebody else will.
My colleague Richard Eskow asked a great question. Goldman booked a profit on its trading operations every single day of the previous quarter. What’s going on?
Simon and Rob responded with the clear answer– proprietary trading, particularly in the derivatives market, operates like a casino. And in casinos, it is not unusual at all for the house to win every single day.
Great, simple question from Simon. By a show of hands, who here thinks that the government would allow Goldman Sachs to fail once the administration gets it’s resolution authority? Not one person in the entire room raised a hand.
Rob Johnson: “The administration has said several times that this bill will end too big to fail. Let’s talk about that.”
Simon Johnson: “Well, it won’t.”
Banking was boring from the 1930′s through the 1970′s– banks made simple, straightforward loans and were heavily regulated, and as a result, didn’t make a ton of money. By deregulating banks, the compensation system got completely out of whack– banks started paying huge bonuses based on short-term profits, while ignoring longer-term risks to the broader economy.
Serious changes to the structure of the financial system would have the effect of cutting back on Wall Street bonuses. But the scope of Wall Street pay has several residual effects on Wall Street’s grip on Washington. Regulators, for instance, are less likely to leave their posts in government for a job in banking when finance doesn’t pay. But the important change is the mystique and glamour of banking. In the 1950s, a banker was a pretty boring guy who played a lot of golf. Today, bankers are super-stylish elites. Thanks in part to America’s obsession with wealth, powerful people in Washington and much of the public believe these bankers must be doing something right to be living so lavishly.
And in a sense, the bankers are doing something very clever– they’ve found a way to live off the public purse and prevented their actions from being subject to serious market or regulatory accountability. Markets don’t work when nobody can be held accountable for their decisions, particularly if those decisions have the potential to wreck the broader economy, which is exactly what happened in 2008.
Another important point from Simon Johnson (surprise!). The view that today’s megabanks are dangerously large and need to be broken up is not a left-wing view. Many progressives and lefties agree with it, but the issue is a matter of fundamental market functionality, and plenty of moderates and right-wingers agree that big banks need to be broken up.
Even Eugene Fama, a conservative, market fundamentalist economist who invented the efficient markets hypothesis, actually agrees that today’s big banks are receiving dysfunctional subsidies from taxpayers and corrupting the very essence of financial markets.
Simon Johnson just drew one of his favorite parallels. When Teddy Roosevelt was trying to break-up the big, corrupt trusts in 1902, the mainstream intelligentsia was totally opposed to it on economic grounds. But by 1912, public opinion was decided in favor of breaking up Standard Oil. So it is today with big banks– people are beginning to realize that the policies handed down to Washington from Wall Street over the past few decades have been terribly destructive, but it takes time to significantly shift public opinion definitively.