Jane D'Arista: Bill put some brakes on speculation but will strengthen monopolization of sector -   July 29, 2010
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Jane D'Arista is a research associate with the Political Economy Research Institute (PERI), University of Massachusetts, Amherst where she also co-founded an Economists' Committee for Financial Reform called SAFER (Stable, Accountable, Efficient & Fair Reform) and gave testimony to Congress on financial reform. Jane served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives, as a principal analyst in the international division of the Congressional Budget Office. Representing Americans for Financial Reform, Jane has currently given Congressional testimony at financial services hearings. Jane has lectured at the Boston University School of Law, the University of Massachusetts at Amherst, the University of Utah and the New School University and writes and lectures internationally. Her publications include The Evolution of U.S. Finance, a two-volume history of U.S. monetary policy and financial regulation.


FINANCE REFORM BILL HELPS 5 BIG BANKSPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay. And now joining us from Hadlyme, Connecticut, is Jane D'Arista. Thanks for joining us, Jane.


JAY: Now, Jane, you've been a member of a group called SAFER, a group of economists who lobbied for more than a year on what you thought should have been in this bill. You're a research associate with the PERI institute and done a lot of work on the legislation. So has this new bill proved that there is now going to be some real reform of the financial sector? Or has it otherwise shown that Wall Street is simply too dominant in Washington politics, and that in fact this bill is not going to really rein in the casino capitalism that helped create such a crisis?

D'ARISTA: It's very hard to sort out the victories and the defeats, to tell you the truth. In many ways, the banks won a lot. There are some guidelines in the legislation that can lead to better things in the future.

JAY: It seems that not just the American government, but the Europeans and Canadians and others, they all seem to think if you can pour enough money into the banks now so that they have a lot of capital reserves, that things can kind of more or less carry on the way they used to. Is that a fair reading of their approach?

D'ARISTA: They think that capital is all that is needed, that capital will take care of the leverage issue of banks taking risky positions, of banks getting too big to fail, etc. And my problem with the legislation basically is I think that it is geared toward the individual institution. They are responding to individuals, individual institutions. In fact, they are responding to five individual institutions, keeping them afloat, keeping them doing the things that they had been doing—making lots of money, paying huge bonuses, etc.

JAY: It seems, Jane, that part of what this legislation accomplishes is, as you say, when they focus on individual institutions, in some ways they're really focusing on the issue of more monopolization in the sector. What I mean by that is another crisis comes, a few more Lehman Brothers or others fall, they'll better manage the fall of those banks, no matter, really, how disruptive the process might be to the people that are involved in it. But it's all going to lead to more and more monopolization, less and bigger institutions.

D'ARISTA: Well, that's right. The point of the legislation that did not get made was how to deal with the famous too-big-to-fail issue. And there was a very good amendment offered by two members of the Senate that would have done it quite well. They were Sherrod Brown of Ohio, Kaufman of Delaware. They were in proposing that an institution should get no larger than 2 percent of GDP. Now, 2 percent of GDP is a fair amount of money for a single institution. And what you also have to worry about is the size of the financial sector as a whole, aggregating all of those institutions, especially those big five. If the big five each had 2 percent of GDP, that would be 10 percent of GDP—plus all the other institutions. But just those and 10 percent of GDP would be a very substantial share of what we produce in this country.

JAY: And that's part of the problem. It's not like these five banks are all off doing five different things. All the banks got into subprime mortgages; all the banks get into this synthetic derivatives. I mean, they're all, like, in a pack going in one direction or the other. Unless there's some specific mismanagement, it's more likely to be a sectorial systemic meltdown rather than just one or two of the banks. Am I not right?

D'ARISTA: Well, that is exactly it. It is going to be systemic because they behave systemically. They all do the same things. They always jump on the same bandwagons. The herding instinct is incredibly strong in any financial system, and throughout history that has been the case, which is, of course, why you need, you know, to have the rules that say you can't lend more than a given amount of your capital to one borrower. And I'm going to jump off there to say, one of the really great provisions of this legislation that came in almost without fanfare, almost unnoticed, was precisely the extension of that quantity restraint on lending not just to nonfinancial companies but to financial companies. Part of this problem, part of this crisis, the interconnection was the banks were borrowing from one another, and they were ignoring—indeed, the Comptroller of the Currency in the United States, about more than a decade ago, had said, you don't have to worry about that law, where it deals with the banking system itself or other financial sectors. And so they were borrowing enormously from one another. And we economists call it, in effect, monetizing debt, what they were doing. They were borrowing, in the repurchase agreement market, short-term funds from another financial institution, and pledging collateral of what's on their balance sheet, using the money then to buy more assets, which they could then pledge for more borrowing to buy more assets. You see, it was a Ponzi.

JAY: Does this legislation do anything to prevent that from happening again?

D'ARISTA: This legislation says you cannot do that any longer, that you, individual institution, can only have a credit exposure to another financial institution at 25 percent of your capital. So all your lending to that institution, all your securities lending, all of your derivatives transactions, have to come in within that 25 percent amount of your capital. That is going to be the most powerful positive position in this legislation to rein in the size of the institutions, to rein in leverage, to rein in to the derivatives department or activities of the institutions, and so on. And so they will not be able to speculate to the degree that they could before if they can't get the borrowing that they need to do those huge positions, which are necessary if they're going to make money.

JAY: Okay. In the next segment of our interview, let's talk about any of the other positives, and then I know you're going to talk about more of the big negative. Please join us for the next segment of our interview with Jane D'Arista on The Real News Network.

End of Transcript

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