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March 24, 2008
The Many Faces of Robert Rubin
Paul Krugman in today's column pushes for more debate over the shadow financial system and quotes Robert Rubin:
"America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take. Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions - the "shadow banking system," which relied on complex financial arrangements to bypass those safety regulations. Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And the government is rushing in to help, with hundreds of billions from the Federal Reserve, and hundreds of billions more from government-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don't have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what's happening now is the quid without the quo. Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks."
Meanwhile on the Newshour on March 21st, 2008 Mr. Rubin:
"JUDY WOODRUFF: Do you agree with those who blame a lot of this on a lack of regulation and a lack of supervision of financial institutions?ROBERT RUBIN: No, I do not. I think what you had was a really quite extraordinary confluence of different factors. You had the seemingly inevitable and inherent aspect of financial markets, which is a tendency to go to excess, and then to adjust and have disruption.
But then on top of that, you had low interest rates that led to a reaching for yield; you had tremendous use of complex financial instruments; and other kinds of factors. They all came together to produce what I think is really an extraordinary situation.
I don't think this is -- no, I do not think this is any fair measure a regulatory failure.
JUDY WOODRUFF: So you don't think we need more regulation, more...
ROBERT RUBIN: Well, let me say, no, I do think we need regulatory change, and I do think the one area in which the uncertainty was, at least in my judgment, an inadequate amount of regulation was in the practices in the mortgage business.
JUDY WOODRUFF: And what needs to be done about that?
ROBERT RUBIN: I think there are two sets of changes that should come out of this, but then I want to mention one very important caveat. Number one, in terms of consumer protection in the mortgage area, there certainly seemed to me -- and this is not an area I'm an expert in, but I know a little bit about -- there certainly seem to me to be practices that probably should not be allowed.
And I think there also needs to be found some way to make far more transparent to the people who are taking out mortgages what they're undertaking. And that is much harder than it seems, because it's a very complex subject for people who're not financially sophisticated.
On the financial market perspective, I think there are aspects of risks to our financial system that ought to be addressed going forward in the regulatory process, particularly around the derivatives and other kinds of complex instruments of financial engineering.
But in all of this, I think the key is to find the optimal balance between increased protection on the one hand and not smothering our free-market financial system."
Hmm? Here is Krugman on his blog "Hiding behind the invisible hand" on the 22nd including a picture that says it all:
"Actually, there was plenty of coordination - a coordinated effort to destroy effective regulation:Consider the press conference held on June 3, 2003 - just about the time subprime lending was starting to go wild - to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.The lack of oversight, in short, was no oversight: it was part of the plan."
Meanwhile in Bailout Nation:
Robert Reich discusses a double standard in America with regard to risky behavior:
"The real moral hazard in this saga started when Fed Chair Ben Bernanke cut the Fed's discount rate (charged on direct federal loans to banks) and announced that the Fed would take whatever action was needed to "promote the orderly financing of markets." Translated, this means that lenders, credit-rating agencies, financial intermediaries, and hedge funds will be bailed out, one way or another, because they're simply too big to fail. Note that behind every one of these institutions lie thousands of well-paid executives who would have lost big if the Fed didn't come to their rescue. Even though they had more information and experience at risk-taking than the suckers who borrowed their money, and even though executives at the top of these institutions typically earn more in a day than the borrowers do in a year, moral hazard somehow doesn't apply to them. When it comes to risky behavior in the market, America has a double standard. We're told that economic risk-taking as the key to entrepreneurial success, but when big entrepreneurs take big risks that fail it's amazing how often they get bailed out..."
JPMorgan agrees to pay $10 a share for Bear Stearns.
"The central bank had also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, people involved in the negotiations said Sunday night."
--Mark Price
Posted by Price at March 24, 2008 09:13 AM