Clinton’s Wall Street Attack Would Only Hurt You and Me
Too many rules, on top of the ones we already have, would limit lending and damage the economy
Memo to Wall Street: Hillary Clinton attacks you in the New York Times not because you did anything wrong. No, it is simply early December, and she is reminding you to make your 2015 contribution. It is time to pony up some big bucks to her favorite charity. Look on the bright side: It is tax-deductible.
Banks should not waste their time reading through the details of the attack. Democratic presidential candidate Clinton mentions what she likes: more regulation, higher taxes on the financial sector and fines that cut into executives’ bonuses. She also mentions whom she does not like: Republicans.
No matter that reining in Wall Street, as Clinton says she wants to do, would not help Main Street, where most Americans are located. Main Street borrows money from Wall Street. When Wall Street doesn’t lend, Main Street doesn’t expand.
“Clinton’s approach to bank regulation is similar to her approaches to health care and pharmaceuticals: use command-and-control to dictate what they can and cannot do...”
Rather than strengthening the Volcker Rule and imposing more bank regulation, as Clinton suggests, a simpler plan would be to expand the capital requirements for banks and make them more transparent.
Professor Charles Calomiris of Columbia University, in testimony before the House Financial Services Committee this summer, proposed requiring banks to hold higher levels of equity to assets, paired with “contingent capital” — debt that would convert to equity if the bank’s equity were to fall past a set level for 120 days. “By using the market value of a bank’s equity as a conversion trigger,” Calomiris explains, “bank managers have an incentive to maintain sufficient true economic capital.”
In addition, Calomiris suggests that companies maintain reserves (about 25%) as a proportion of their total debt at the central bank and limit real-estate lending.
Mickey Levy, chief economist of Berenberg Capital LLC, agrees. He told me in an email that “higher and well-enforced capital standards would be a much more effective way of reducing bank leverage than Dodd-Frank without some of its unintended consequences.”
Clinton’s approach to bank regulation is similar to her approaches to health care and pharmaceuticals: use command-and-control to dictate what they can and cannot do, including the services they provide and the prices they charge. As we have seen from Obamacare, that has its disadvantages. Bankers are smarter than regulators, and they can think of new products that get around the rules faster than regulators can pass updated rules. Some banks might switch products or go out of business, just as UnitedHealthcare is considering pulling away from offering health insurance on public exchanges.
Clinton says her “plan would strengthen the Volcker Rule by closing the loopholes that still allow banks to make speculative gambles with taxpayer-backed deposits. … My plan also goes beyond the biggest banks to include the whole financial sector.”
“As soon as Clinton were to close one loophole, banks would find another... the entire system would get politicized, because the rules would be so complicated.”
Good luck with that. As soon as Clinton were to close one loophole, banks would find another. Further, the entire system would get politicized, because the rules would be so complicated. Clinton’s friends would get a pass, and the others would find themselves enmeshed in red tape.
No one wants banks to take on undue risk. Republicans and Democrats are jointly searching for solutions. But political opportunists go after big banks because an effective anti-bank campaign is a cheap way to buy votes. The notorious gangster John Dillinger explained that he targeted banks “because that’s where the money is.”
Rather than give all of the bonus pool to those hard-working associates and partners, banks should allocate some for Clinton’s favorite charity: the one whose name begins with her last name and ends with “Foundation.”
Lessening the influence of the Consumer Financial Protection Bureau, Dodd-Frank, the “tough, independent regulators” on the Securities and Exchange Commission and the whistle-blowers might not be possible in a Clinton administration. But if a certain charity gets a generous donation — who knows — miracles might happen.
This piece originally appeared in WSJ's MarketWatch
This piece originally appeared in WSJ's MarketWatch