In today's NYTimes, Hillary Clinton lays out her plans to reform Wall Street. As you may have expected, I am not (for the most part) a fan:
Right now, Republicans in Congress are ... attempting to defund the Consumer Financial Protection Bureau.
She says that like it is a bad thing. But the CFPB is seriously flawed, as a summary from the House Financial Services Committee explains:
Established by the Dodd-Frank Act, the CFPB's radical design is unique among financial and consumer regulators, including those responsible for consumer and investor protection. Not only does it evade the traditional system of checks and balances championed by James Madison in Federalist #51, it also lacks the internal controls Congress built into other regulatory agencies.
... the CFPB escapes congressional budgetary oversight, obtaining its funding directly from the Federal Reserve instead of through the regular appropriations process. This end-run around Congress leaves no check to ensure the CFPB director is spending the people’s money effectively to promote consumer protection, much less efficiently in this time of runaway debt and deficits. In fact, we've already begun to see the result of this lack of oversight in the CFPB's egregious headquarters renovation costs.
Unaccountable to Congress, we see that the CFPB eludes even the power of the president. The bureau's director, once appointed and confirmed, can only be removed by the nation's chief executive for cause. And don't count on the president to enforce spending discipline or regulatory restraint at the CFPB; the bureau is neither subject to the Office of Management and Budget nor the Office of Information and Regulatory Affairs.
The most glaring difference between the CFPB and other regulators in the chart above, however, is the bureau's shocking lack of judicial oversight. Section 1022 of the Dodd-Frank Act provides that where the bureau disagrees with any other agency about the meaning of a provision of a federal consumer financial law, a reviewing court must give deference to the bureau’s view under the Chevron Doctrine.... the CFPB is unaccountable even to itself since there is fundamentally no ‘it,’ no ‘they’ – only a he. Be he our credit czar, national nanny or benevolent financial product dictator, the CFPB director's authority is unilateral, unbridled and unparalleled. Without the check of a bipartisan commission, the director can declare virtually any financial product or service as ‘unfair’ or ‘abusive,’ at which point Americans will be denied that product or service even if they need it, understand it and want it.
Finally, the CFPB lacks a dedicated inspector general (IG) to root out waste, fraud and abuse at the bureau. Given the findings by the Housing and Urban Development IG we highlighted last month, taxpayers should be outraged by this complete lack of accountability, oversight and transparency in the way the CFPB spends the people's money.
We have seen the mischief Obama appointees can get up to on agencies with bipartisan commissions (e.g., SEC and NLRB). The lack of constraints on the CFPB is thus truly appalling.
Back to Hillary:
My plan proposes legislation that would impose a new risk fee on dozens of the biggest banks — those with more than $50 billion in assets — and other systemically important financial institutions to discourage the kind of hazardous behavior that could induce another crisis.
This is basically a tax on bigness. I'm not entirely opposed to limiting the size of banks as a prophylactic means of preventing government bailouts, although I'd prefer a ban on bailouts. But I don't see how this fee would target specific risky behavior.
I would also ensure that the federal government has — and is prepared to use — the authority and tools necessary to reorganize, downsize and ultimately break up any financial institution that is too large and risky to be managed effectively. No bank or financial firm should be too big to manage.
Why would we think federal bureaucrats are well positioned to decide which banks as "too big to manage"? Or that they would be able to "reorganize, downsize and ultimately break up" a bank in an equitable and efficient way.
My plan would strengthen the Volcker Rule by closing the loopholes that still allow banks to make speculative gambles with taxpayer-backed deposits.
There's never been any evidence that the Volcker rule--even in most extreme form--would have prevented any of the conduct that resulted in the financial crisis. On top of which, drafting the Volcker Rule proved to be a nightmare. It is simply not possible to develop a version of the rule that is simultaneously fair, effective, and administrable.
Hillary then turns to "the 'shadow banking' sector, including certain activities of hedge funds, investment banks and other non-bank institutions":
My plan would strengthen oversight of these activities, too — increasing leverage and liquidity requirements for broker-dealers and imposing strict margin requirements on the kinds of short-term borrowing that also played a major role in spurring the financial crisis.
I'm actually okay with some of this. But what I'd really like--limiting hedge fund shareholder activism--is unlikely to come from Hillary.
Second, I would appoint tough, independent regulators and ensure that both the Securities and Exchange Commission and the Commodity Futures Trading Commission are independently funded — as other critical regulators are now — so that they can do their jobs without political interference.
See the discussion of the CFPB above. The concern here is that insulating agencies from political interference insulates them from accountability.
I would seek to impose a tax on harmful high-frequency trading, which makes markets less stable and less fair.
I'm not intrinsically opposed to clamping down on high frequency trading. It's the "how high is too high" that is the problem. How do you come up with an administrable tax that is not purely arbitrary in the cut-off between taxable and non-taxable levels of trading. And how did you make sure that you aren't cutting too deep, so as to ensure you don't reduce market liquidity. In addition, of course, given the global nature of markets, it won't do much good if the effect of the text is to simply move high frequency trading off shore.
And we need to reform stock market rules to ensure equal access to information, increase transparency and minimize conflicts of interest.
Equal access? Really? You will never achieve equal access and it would be a bad idea to try.
Finally, executives need to be held more accountable. ... And it shouldn’t just be shareholders and taxpayers who feel the pain when banks make bad decisions; executives should have skin in the game. When a firm pays a fine, I would make sure that the penalty cuts into executives’ bonuses, too.
I'm good with half of that. In fact, I have been advocating individual rather than enterprise liability for a long time. My complaint is that retaining enterprise liability is a bad idea.
And I would fight to close the carried interest loophole that gives some fund managers billions of dollars in tax breaks: They should be taxed like every other citizen.
Fine by me.
The proper role of Wall Street is to help Main Street grow and prosper.
The trouble is that Clinton hasn't made one proposal -- not one -- to encourage capital formation. Likewise, she hasn't made one proposal -- not one -- to reform the regulatory burdens that currently discourage capital formation.
If you like 2% annual growth as the ceiling of our economic potential, you'll probably be okay with Hillary. But if you think 2% is tepid, you've got to vote for somebody who will care about capital formation more than red tape.
