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What should Rubio have told Wall Street? ‘I’m not a crony capitalist, man’

Image Credit: Gage Skimore (Flickr) (CC BY-SA 2.0)

Image Credit: Gage Skimore (Flickr) (CC BY-SA 2.0)

Senator Marco Rubio has been meeting with some Wall Street big shots – Stephen Schwarzman, Henry Kravis, and top execs at Goldman Sachs — in an effort, according to Politico, “to lock down some of Wall Street’s biggest donors ahead of the 2016 presidential race.” I don’t know what Rubio told them, but the WSJ’s Peggy Noonan suggested that he and other potential GOP 2016ers preach of message of free-market populism:

“I’m going to steer this party away from Wall Street and toward what used to be called Main Street and doesn’t have a name anymore. Our economy won’t take off again until our pigsty of a tax code is cleaned up. People have to feel everyone’s being treated fairly, that the rich aren’t calling the shots and gaming the system. And all future growth could be stymied if you guys make a half-trillion-dollar wrong bet tomorrow because some trader in London was high as a kite on Ambien. That could bring down the system the way it crashed in ’08. So we have to change the system. Too big to fail is too big to live.”

I suppose among the policies that would reinforce such messaging would be a) busting up the biggest banks via some combo of size caps, restructuring, vastly higher equity levels, b) a transaction tax-corporate tax cut swap to deal with high-frequency trading, c) curtailing the tax inducement for excessive financial leverage by scaling back the interest expense deduction.

Make no mistake, this would be a radical departure from the standard GOP financial reform menu. No idea if Rubio has an interest or not. But the Politico piece reminds that pay-to-play rules would hamper Chris Christie and Bobby Jindal in raising Wall Street cash should they run. Perhaps they could turn that liability into an opportunity for some policy creativity.

23 thoughts on “What should Rubio have told Wall Street? ‘I’m not a crony capitalist, man’

  1. Why would someone seeking the Republican nomination for President want to present such a government-heavy platform as you suggest? Raising billions of dollars in new financial taxes that would slow down the efficiency of the financial markets and make U.S. markets less attractive to global investors? Smacking the banking industry with even more heavy handed and massive regulation than Dodd-Frank so that they can operate within a 1930s bank box, ceding all future growth and efforts to meeting emerging customer needs to nonbanks? Sounds like very poor advice, to me.

      • Perhaps not. But there is a justification if the large Wall Street firms use their positions to gain advantage over others. The issue seems to be one of conflict of interest and crony capitalism. If the government permitted actual competition you would not have to do a thing. The fact that it has been captured by those that it is supposed to regulate creates some serious problems.

        • I do not understand what you are saying. Are you suggesting that high frequency trading is not subject to competition? What is the crony capitalism that you are suggesting is at work with regard to high frequency trading? We need to know that to figure out why a whole new taxation program would “solve” that.

          • I do not understand what you are saying. Are you suggesting that high frequency trading is not subject to competition? What is the crony capitalism that you are suggesting is at work with regard to high frequency trading? We need to know that to figure out why a whole new taxation program would “solve” that.

            I am saying that the game is rigged. The big players have access to what is essentially free money from the Fed that they can borrow at great quantitates without collateral and use it to manipulate the markets. I think that if the Wall Street firms want to trade the markets they should do it with their own capital without special access and privileges. Not that these are the same companies that had to be bailed out by the taxpayers and were able to sell their worthless assets to the Fed. I have no problem with risk but I do have a problem with rigged markets.

          • @Vangel: Thank you. I understand your point better. I join you in not favoring any special advantages for one firm over another. And I believe that markets have the best track record for regulating economic conduct.

            I am not sure where I see the “free money” from the Fed. If anything, banks are taking it on the chin from the artificially low interest rates from Fed policies, which are transferring billions from lenders to borrowers, Uncle Sam being the biggest borrower.

            The criticism that banks should work with their own capital ignores the fact that all of their “capital” is their own. That is their equity, and it is at risk every day. But banks, by definition, are intermediaries. They transfer funds from savers and lend or provide other financial services to borrowers. Whether that is done through direct loans (the riskiest thing that banks do and the single most important source of bank failure–recently and throughout history) or through a variety of other investment vehicles, bank activities contribute to the efficient allocation of financial resources that is at the heart of “capitalism”. I’m not quite sure what you refer to as “Wall Street” activities of banks, but assuming that maybe you mean proprietary trading, market making, and derivatives activities, those actually tend to be the lower risk operations of banks and have contributed to bank earnings when they were taking losses on their lending portfolios.

          • I am not sure where I see the “free money” from the Fed. If anything, banks are taking it on the chin from the artificially low interest rates from Fed policies, which are transferring billions from lenders to borrowers, Uncle Sam being the biggest borrower.

            The Fed purchased impaired paper from the Wall Street firms at par. It allows them to borrow for nothing and use the proceeds to buy bonds that have higher yields. That allows the banks to slowly recapitalize and repair their balance sheets. The problem is that this cannot work because the Fed is now left holding a massive quantity of paper that has an average duration of around 10 years or so. When rates go up the Fed will take massive losses and will not be able to get out of the corner that it has painted itself in. And if you look at the big banks, they have far too much leverage to survive the next contraction, which is a lot closer than the people on this site seem to expect.

            The criticism that banks should work with their own capital ignores the fact that all of their “capital” is their own. That is their equity, and it is at risk every day. But banks, by definition, are intermediaries. They transfer funds from savers and lend or provide other financial services to borrowers.</b.

            But that is not what the banks seem to be doing. They are using deposits to gamble on the markets and proprietary trading programs to bet against their own customers. That will end badly.

            Whether that is done through direct loans (the riskiest thing that banks do and the single most important source of bank failure–recently and throughout history) or through a variety of other investment vehicles, bank activities contribute to the efficient allocation of financial resources that is at the heart of “capitalism”.

            In theory it is true that banks can contribute to the efficient allocation of financial resources, particularly when you have a hard currency that limits credit bubbles. But it is not true in a fiat world where fractional reserve lending can create a great deal of purchasing power out of thin air.

            I’m not quite sure what you refer to as “Wall Street” activities of banks, but assuming that maybe you mean proprietary trading, market making, and derivatives activities, those actually tend to be the lower risk operations of banks and have contributed to bank earnings when they were taking losses on their lending portfolios.

            The well managed small banks were not looking at total destruction in the aftermath of the housing bubble. It was the GSEs and large Wall Street firms who were staring at bankruptcy as their impaired paper and failing couterparties threatened to consume all of the equity. From what I see the banks are not in a much better position today. They still have taken on far too much leverage and are one accident away from asking for a bailout.

          • @Vangel, Take 2: Interesting and well stated points. I concur that there are some very serious dangers ahead. Particularly, I see the danger of a bubble in Treasury securities that will cause serious problems when interest rates start to rise. History does not lend confidence about the Fed’s ability to control that interest rate rise once it gets going. I disagree with you, however, about how well banks are prepared to weather another downturn. Capitalization is at record levels. Moreover, bank capital held up well throughout the recession–even with the TARP side show, which most banks repaid as quickly as law would allow, and (at high interest rates, too). I see a comparison with the 1937 second dip in the Great Depression–there were few bank failures then, because they had largely worked through their bad assets and new loans were much stronger. That seems to be the case with the banks today that made it through the recent recession.

            On fractional reserve lending, that has been the basic western banking model for a very long time. Nothing new there. I understand that there are those–and I respect the view–who think that we should get away from fractional reserve banking, but that is a whole different discussion.

            That “impaired paper” held by the Fed–and bought from many sources I might add–contributed to the Fed’s earnings of nearly $100 billion last year. The Fed purchased for liquidity and monetary policy purposes, and it was by no means “free money” to the banks.

          • @Vangel, Take 2: Interesting and well stated points. I concur that there are some very serious dangers ahead. Particularly, I see the danger of a bubble in Treasury securities that will cause serious problems when interest rates start to rise. History does not lend confidence about the Fed’s ability to control that interest rate rise once it gets going.

            The idea that some people can control the economy by pulling a few levers behind closed doors is laughable but that is what the Fed supporters believe in. I suspect that the market will try to teach them a lesson. Whether they want to learn the lesson is a different question.

            I disagree with you, however, about how well banks are prepared to weather another downturn. Capitalization is at record levels. Moreover, bank capital held up well throughout the recession–even with the TARP side show, which most banks repaid as quickly as law would allow, and (at high interest rates, too).

            I don’t see that. The banks are heavily leveraged and involved in a lot of mark to model activities that scare me. In theory they are also supposed to be on the hook when the Fed wishes to sell them back that impaired mortgage paper that they unloaded in the aftermath of the crisis. Somehow I do not believe that the banks will hold up well during the next crisis particularly if we have the bond bubble beginning to lose a lot of air.

            I see a comparison with the 1937 second dip in the Great Depression–there were few bank failures then, because they had largely worked through their bad assets and new loans were much stronger. That seems to be the case with the banks today that made it through the recent recession.

            Sorry but I do not see it. The derivative market has exploded and someone is on the hook for bad bets or has counter-parties that will not hold up well during the next downturn. I see the American banks in the same boat as their European counterparts.

            On fractional reserve lending, that has been the basic western banking model for a very long time. Nothing new there. I understand that there are those–and I respect the view–who think that we should get away from fractional reserve banking, but that is a whole different discussion.

            Once again I disagree. It is one thing to engage in fractional reserve lending when you are constrained by a gold standard but that restraint goes away in a fiat system. The amount of leverage in the banking system that we have now was unthinkable in the past.

            That “impaired paper” held by the Fed–and bought from many sources I might add–contributed to the Fed’s earnings of nearly $100 billion last year. The Fed purchased for liquidity and monetary policy purposes, and it was by no means “free money” to the banks.

            Ain’t accounting wonderful? Buy something worth $0.35 for $1.00 and still report gains. Who could ask for anything more?

          • Wayne, your comments are cogent, articulate, and intelligent. Thank you for bringing a reality orientation to this discussion.

  2. The muppet problem is being dealt with. Enough money has been stolen by wall street, pickpocketed from suckers all over the world, via the govt.s they control. The dollar is the world’s fiat currencey backed by the full faith and credit of the US military. At some point pigs at a trough get full and go take a nap.

  3. Marco Rubio is Jeb Bush’s Waterboy! He is Jeb’s client and gives Jeb conservative cred. There is no way in hell that the grandson of Prescott Bush is going to allow his lapdog to insult Wall Street.

    Rubio is part of the corrupt crony capitalist Bush Crime family who has no intention of cleaning up the cesspool. They make too much money and retain their power because of it. Did Rubio object and get in Jack Lew’s face, no. There is your answer.

    The conservatives need to kiss the corrupt Bush controlled GOP good freakin’ bye.

    I’m done with the GOP. Jebbie will be the nominee just because Battle-ax Bab’s rolodex says so.

  4. Lately Obama has been saying, “I am not going to have a conversation about…” Add any number of endings, like for example, the debt limit. In other words, we will discuss what I wish to discuss, and nothing else. Thus we will confine action to my agenda. There has been no effort to use diplomatic language that any normal president would understand is necessary in a democracy. The language has been, I won; you lost; I am in charge.

    Twice in the last few weeks Obama has said he is not a dictator. But isn’t dictating what can and cannot be discussed dictatorship – or the verbalizations of a tyrant? It’s pretty clear Obama thinks of himself as the most intelligent, infallible, best equipped, president ever, ie, by every measure he has license to be dictator.

    If we value our freedoms this man needs to be watched. Someone said that liberty is lost in darkness. But it can also be lost in the full light of day.

  5. I’m Marco Rino & I agree with John McCain. Amnesty for everyone. Just don’t tell Jeb Bush that I stand for this! !

  6. UNFORTUNATELY, the Wall Street boys are not the necessary evil; they are the absolute evil for the US. In order to join, one now has to wear a kippah…
    Rubio (Cruz, etc.) and those pseudo-Conservatives who support him are minions of crony-bolshevik-bankster-capitalism that unless outlawed now will render Americans slaves of their chosen masters…

  7. Vangel wrote:
    “The Fed purchased impaired paper from the Wall Street firms at par.”

    I confess that I don’t know about this particular set of circumstances, but when I was at a primary dealer (for 20+ years-but quite a while ago) and the Fed did a ‘go-round’ to purchase securities from primary dealers, the procedure was to call dealers and invite them to offer securities of the maturity and type the Fed was interested in purchasing.

    The dealers then responded with a list of those securities which they were willing to sell to the Fed and at what prices/yields. T

    The Fed then ranked these offerings from the various dealers in order of their desirability, i.e. who was offering what at the highest yield? Purchases were made accordingly.

    Thus, if securities were offered and subsequently bought at par, it was not because the Fed was willing to buy all securities at par, it was because par was the cheapest level offered by the list of dealers making the offerings.

    You also mentioned ‘no collateral.’ If you were referring to the various liquidity programs put in place by the Fed during the worst of the crisis period, if you check back you will find that most, if not all of those programs required the posting of collateral. There may be some just criticism in a lowering of credit quality for collateral, but in most all programs, 102% collateral levels were required, IIRC.

    Now, if I’ve got this wrong, and events/procedures/policies were not, in this period, as I remember from many years ago, I won’t be offended to be corrected.

    • Now, if I’ve got this wrong, and events/procedures/policies were not, in this period, as I remember from many years ago, I won’t be offended to be corrected.

      The Fed bought mortgage securities that had no market at anywhere near par at par from the dealers. Please tell me how that is not meddling with the markets and what happens when the loans come due. What exactly did the Fed get from the Wall Street firms when it bought their paper? Sorry but I do not see how any of this ends well over the long term. We have a case where the Fed is holding impaired paper that has to be purchased back by the financial companies or a case where the Fed gets to sell the impaired paper to the Treasury and the taxpayer takes the loss. In no case do you actually have a free market that imposes discipline on the players who are reckless and take too many risks.

      • I think that you are forgetting what the Fed was created to do, lo those 100 years ago: it was created precisely to acquire or lend against assets that were subject to panic valuation in the markets but that in fact had a cash flow value greater than the market value. That is how liquidity is provided to stem panics. The Fed was specifically created to be a counterweight to panicked market sentiment.

        That part of the Fed’s job the Fed did very well in 2007 and 2008. And just how “impaired” are those assets? So far the Fed has contributed to the U.S. Treasury more than $100 billion in earnings from those assets.

        Does the Fed have too much in the way of assets today? Most likely. But I put this question: When the interest rates at last rise, will the Fed lose more from the assets that are still providing cash flow or from the Treasury securities it holds that will cause market losses? I think that it is hard to say. Which assets will be more impaired?

      • You will have to offer more than your assertions to prove that the Fed one, bought securities at par regardless of their market value at the time (in contravention to long-standing practice), and two, required no collateral for borrowings. Read through the following for information how the Fed’s liquidity facilities actually worked:

        http://www.federalreserve.gov/monetarypolicy/bst_lendingprimary.htm

        As you do, take note of the collateral requirements.

        • You will have to offer more than your assertions to prove that the Fed one, bought securities at par regardless of their market value at the time (in contravention to long-standing practice), and two, required no collateral for borrowings. Read through the following for information how the Fed’s liquidity facilities actually worked:

          http://www.federalreserve.gov/monetarypolicy/bst_lendingprimary.htm

          As you do, take note of the collateral requirements.

          Please. We know that the Fed was aware of the LIBOR scandal but did nothing about it. We know that the Fed bought paper at par that would sell for a 50% or higher discount in the market. People like Marc Faber, Jim Rogers, James Grant, Ron Paul, Doug Noland, and even Bill Gross were talking and writing about the problem, some even before the crisis began.

          I just did a quick search and found a few arguments similar to mine that popped on the first page of my Google search. They are given below.

          http://www.theamericanconservative.com/articles/an-iceberg-called-bernanke/

          http://www.silverdoctors.com/a-light-on-the-future-for-investors/

          https://www.lordabbett.com/advisor/commentary/investmentperspectives/QE3-expectations-and-refinancing-plans/

          Or you could forget what others said and listen to the helicopter man himself.

          “Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”

          It now seems clear that Ben did what he promised to do. The fact that you cannot see it is somewhat surprising. What I found ironic was the fact that Ron Paul predicted this in 2005 when he was talking about the housing bubble and pointed out that the GSEs were “the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve.” At the time the Fed minutes show that the people inside the Fed were oblivious to the bubble. But when the bubble burst the Fed had no problem using its new authority to purchase the new products that the GSEs had sold but were trading at a steep discount to par. Because the Fed did not want to allow the financial institutions that held these products to fail it purchased those instruments at par. And kicked the can down the road for others to deal with at a later date.

          As I wrote above, what the Fed says the rules are is one thing. What it actually does is another.

          • So where in your links does it say that the Fed paid par for securities worth less than par? Answer: It doesn’t.

            Your links are merely more assertions about your overriding thesis that the Fed has made a mistake with it’s various liquidity-provision programs and subsequent QE programs. I’m not denying that the QE programs may eventually be proven a bad idea; I am asserting that your are incorrect that the Fed automatically paid par for securities bought from the primary dealer community.

            Furthermore, AFAIK, the loans made by the Fed via it’s various liquidity-providing programs all required collateral, typically at the 102% level.

            While I have taken you to task about specific assertions you have made, you have responded with generalities and opinions and have failed to respond to my specific points.

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