Pethokoukis

Should Romney pull a ‘Nixon to China’ and aggressively push banking reform?

Is the U.S. financial system more resilient and stable than before the Great Financial Crisis? Tough to know for sure, but lots of hints that it isn’t.

MF Global and the missing $2 billion.

JPMorgan and its $6 billion in trading losses.

The manipulation of LIBOR, the interest rate which underlies some $350 trillion in financial derivative contracts.

Oh, and the biggest banks are even bigger than before the GFC, despite the Dodd-Frank financial reform law.

All of which presents a tremendous and ongoing political problem and political/policy opportunity for Mitt Romney, who made hundreds of millions as a venture capitalist and private equity investor. “Romney’s biggest problem is that, for most Americans, he appears to be a banker,” said Eurasia Group’s Ian Bremmer on Twitter recently. “If I’m advising Obama, that’s my A game. My B game, too.”

And bankers, never the most popular folks, are particularly disliked right now. In addition, the Obama campaign has attacked Romney as wanting to restore the economic policies of George W. Bush, which it says caused the financial crisis in the first place. The winning electoral equation, as they see it: A Romney presidency = George W. Bush’s third term = a return to economic catastrophe.

But if Romney presented an aggressive, free-market, anti-crony capitalist, financial reform agenda — something beyond the fuzzy “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework” pledge on his website — he could demonstrate he’s neither a creature of Big Money nor a Bush clone. Oh, and he would be putting forward some smart policy ideas, too.

Here’s a possible Romney financial reform agenda:

1) Endorse the Hoenig Plan. Thomas Hoenig, vice chairman of FDIC and former president of the Kansas City Fed, wants to bust up the big banks. He would only allow banks to engage in traditional activities that are well understood and are based on long-term customer relationships so borrowers and lenders are on the same page: Commercial banking, underwriting securities, and asset management services. Banks would be barred from broker-dealer activities, making markets in derivatives or securities, trading securities or derivatives for their own accounts or for customers, and sponsoring hedge funds or private equity funds.

 2. Go after high-frequency trading. Financial markets seem more volatile than ever, and one reason might be super-fast, or “high-frequency,” trading, where computers buy and sell bonds, stocks, and derivatives in milliseconds. As my friend Martin Hutchinson of the Asia Times puts it:

High-frequency trading is objectionable for two reasons. First, its proponents claim it provides liquidity to the market, but that’s not really the case. In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it.

The second reason high-frequency trading is bad is that it uses machines to get trade information before competitors. Of course, trading based on extra-fast knowledge of the trading flow should qualify as inside information, and thus be illegal.

Unfortunately, it can’t be made illegal, because market-makers do it all the time. And what’s more is that stock exchanges make huge sums of money by renting space within feet of the exchanges’ computers to high-frequency traders.

Hutchinson recommends a 0.01%-0.02% Pigovian tax on trading stocks and bonds and a 0.05% tax on derivatives to tamp down on such speculation. The revenue could be used to lower the overall corporate tax rate.

3. Endorse the mortgage refinancing plan of his own economic adviser. Economist Glenn Hubbard, along with his colleague Christopher Mayer at Columbia University, has devised a plan where every homeowner with a GSE mortgage could refinance his or her mortgage with a new mortgage at a current fixed rate of 4.20% or less. Nearly $4 trillion of mortgages could be refinanced, helping roughly 30 million borrowers save $75 billion to $80 billion a year. As Hubbard and Mayer see it, it would be like a long-­lasting tax cut for these 25 or 30 million American families. ”The plan would have an immediate fixed cost to the government of $242 billion with half that cost split equally between the government and banks.”

Some of these ideas I like, some perhaps less so. And many of them would be better done jointly with other advanced economies, if at all. But assuming the Romney policy wonks could make the economic case for them to their boss, they would seem to have a lot of political upside for the Republican nominee.

President Obama is slamming Romney as a vulture capitalist. His response is that Obama is a crony capitalist. Real financial reform would help Romney make his case beyond attacking Solyndra and Obamacare deals. In fact, it’s hard to see how Romney can sell that line without it.

9 thoughts on “Should Romney pull a ‘Nixon to China’ and aggressively push banking reform?

  1. frankly i think this is tall weeds for a campaign where the basic American, dumbed down to the point of neanderthal by a complicit media, is fed messages: Bain bad, Obama green company good….I would love to see ROmney ask O to release his transcripts, his college records, his medical records, his tax returns way back when, and explain why he has a law firm trying to throw legal roadblocks in the way of anyone trying to find the truth.

  2. I doubt it. Every one of these recommendations runs counter to the policies of Mitt’s bankster and billionaire buddies. Restore Glass-Steagal, an aggressive CFPB, boring banking, breaking up banks etc., are all agains the interests of the elites and the Wall St bundlers of Mitt. Of course poorly informed Faux News junkies like dudette won’t understand that

    • Agree on all counts with jbeck. I heard Mitt in a speech saying he would repeal not only Dodd Frank, but Sarbanes-Oaxley too, the last reg standing under which we can prosecute the behavior that has destroyed the world economy. And btw “Peter Principle,” taxation of bad behavior (which HFT certainly qualifies as) IS the free-market means (however ineffective I am certain it would be) of regulation because it leaves the “I don’t create anything but greed and chaos” investors “freedom” to decide whether to engage in flagrant and world destroying insider trading. We are certainly not going to see the end of Casino Capitalism at the hands Enabler in Chief #1 (should he be elected).

  3. I agree. Romney should do this. Obama is obviously vulnerable from the left on banking reform. He won’t, of course. He doesn’t believe in those policies, and Wall Street is funding him.

    Odd that the Repubs have picked a candidate who is completely unable to attack Obama’s 2 biggest weaknesses (banking reform and health care).

  4. Excellent advice. Though conservative in thinking I’m extremely skeptical that GOP is less corrupt than Dems, just in a different way. I might not vote if Romney does not show some genuine character – I’ll hear it in his voice and words when he does. Even my kids get how insane it was to repeal Glass-Steagal. Maybe the old guard does not comprehend how the internet has raised awareness and understanding, especially amongst Generation Screwed.

  5. Replace all the new regulations with one regulation. If a bank becomes too big (fill in a number but one that would capture BA, Goldman-Sachs, Wells Fargo, etc) its depositors lose FDIC insurance coverage.

  6. So Pethokoukis’s “free market” solution is a.) trust busting on a grand scale, b.) the Volcker Rule on steroids, c.) new taxes, and d.) a massive, government-mandated transfer of income from banks to mortgage holders.

    With conservatives like that, who needs socialists?

  7. Jim nails it here.

    The only suggestion I would add is that the free market philosophy he talks to should be the basis for health care reform as well.

    In fact we should follow the same free market model for health care that Bill Clinton put forward with the Internet. That is to keep Government hands off of it. (The real definition of “Net Neutrality.”)

  8. Cynics out there should keep in mind that the venture capital business is miles apart (and of a totally different mindset) from those making their living from quantitative trading gimmicks and the sale of bad new ideas to fixed income portfolio managers. Although Bain and its fellow firms need infusions of capital from time to time to make their investments, and eventually need underwriting syndicates in order to place their successes in the market, they should have no love lost for the traders who confuse and complicate financial markets by diverting hundreds of billions into the short-term churn of derivatives, most of which have nothing to do with equity stakes in anything. If Romney has any concern at all for the business that made him rich, he should be interested in, rather than opposed to the re-structuring of Wall Street.

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