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.