Blog on the Run: Reloaded

Wednesday, June 24, 2009 8:24 pm

The same people who blew up the economy want us to take their advice on economic reform

Filed under: I want my money back. — Lex @ 8:24 pm
Tags: , ,

… for which I have six words: not just no, but hell, no:

There are an array of reports today outlining the steps that the banking and financial services industries are taking to gum up various aspects of the plan to beef up Wall Street regulation.

There’s a new industry group — the Financial Instruments Reporting and Convergence Alliance (FIRCA) — fighting an accounting rule change meant “to end a practice that contributed to the risky lending that set off the financial crisis.” Hedge funds, organized into the Managed Funds Association, are mobilizing “money and power to fend off tougher oversight, higher taxes and much greater transparency.”

And of course, banks are continuing to raise a stink about the Obama administration’s plan to create a new consumer protection agency. All of which makes this report from the Research Department at the International Monetary Fund (IMF) (via The Stash) extremely timely.

The paper shows that the financial firms that did the most lobbying from 1998 to 2006 also had lower lending standards, a greater tendency to securitize, a larger presence in areas that are suffering the most from loan delinquencies, and ultimately lost the most money during the financial implosion. The researchers concluded that financial sector lobbying of this sort poses a threat to economic stability and increases systemic risk:

[The results] tend to support a theory of “moral hazard” whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms not because they have better capacity to evaluate risks associated with the loans, but because they expect short term gains from these loans during the boom phase, and to be bailed out when losses amount during a financial crisis. These results…provide indirect evidence that lobbying might have the potential to threaten financial stability and contribute to systemic risk.

Of course, no one could have possibly seen that coming.

2 Comments

  1. It really shouldn’t be a surprise that the firms with the lowest lending standards had the highest losses. As for lobbying, we could clean up lobbying simpoly by prohibiting lobbiests from lobbying for special tax breaks, credits, incentives or other special treatments. Lobbyists however should not be banned from taking opposition stances to proposed legislation that may adversely affect their clients or promoting legislation that does not involve special advantage

    Comment by Jon Firebaugh — Thursday, June 25, 2009 3:44 pm @ 3:44 pm

  2. Well, no, Jon, the correlation between low standards and losses is no surprise; it’s the correlation between losses and lobbying that was interesting to me.

    I think your approach to the lobbying problem probably would work better than what we have now, but 1) it won’t solve the biggest problem, which is that congresscritters have almost all gotten away from the notion that they’re there to represent average constituents, not large corporations; and 2) I suspect your approach, if legislated, wouldn’t survive a court challenge. This is, after all, a Supreme Court that equates creating speech with buying an audience (Buckley v. Valeo).

    Comment by Lex — Thursday, June 25, 2009 3:59 pm @ 3:59 pm


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