In politics, true power is shown by the ability to steer the conversation to what you want to talk about and away from what you don’t want to talk about. Using this power means preventing a public conversation where the right argument is made if this argument is not in the interest of those with true power.
Nowhere was this more evident than in the Minneapolis Fed’s effort to explore how to end Too Big to Fail banks.
As regular readers know, I tried to present transparency as the alternative solution to more growth crushing regulation (see here and here) to end the problem of Too Big to Fail banks. I was prepared to talk about a few of the many benefits of transparency and why they solved the problem. But I was never given the chance to make this argument.
Instead, the members of the Opacity Protection Team went from one public hearing to the next talking about solutions that continue to allow our Too Big to Fail banks to gamble with taxpayer money safe in the knowledge a future bailout is guaranteed.
Guaranteed? Even if the so called Minneapolis Plan is fully implemented, there is still almost a 1 in 10 chance of a bailout should we have a financial crisis in the next 100 years. Given the performance of regulators in 2008/2009, can you imagine any regulator not bailing out the Too Big to Fail banks if they think by not doing so they will trigger another Great Depression? Yes, guaranteed!
Who are the members of the Opacity Protection Team? The Minneapolis Fed provided a list:
Expert participants in our symposiums included former policymakers such as former Federal Reserve Chairman Ben Bernanke, Vice Chairman Roger Ferguson, and Governor Randy Kroszner. They included leading academics, such as Anat Admati of Stanford and Simon Johnson of MIT, among many others. They included policy experts from think tanks, such as Adam Posen of the Peterson Institute and Aaron Klein of the Brookings Institution. And they included economists currently working at policymaking institutions, such as Giovanni Dell’Ariccia of the International Monetary Fund (IMF) and Mark Flannery of the Securities and Exchange Commission. At every symposium, we invited the private sector to participate and were pleased to hear from experts across several segments of the financial services industry, including John Bovenzi of Oliver Wyman and Michael Hasenstab of Franklin Templeton.
Team members include former policymakers, academics/economists and think tank experts. It also includes existing bank regulators claiming to want to end the problem of Too Big to Fail.
Neel Kashkari @neelkashkari 19h19 hours ago Norwalk, CT
Neel Kashkari Retweeted Richard Field
Though I do not agree transparency itself solves all problems, i appreciate you taking the time to offer your thoughts. #EndingTBTF
In a moment of true humor, Mr. Kashkari speculated on why the leaders of the Opacity Protection Team, the Too Big to Fail banks, wouldn’t participate in the Minneapolis Fed’s symposiums.
The largest banks, however, refused to participate, for fear their presence would be viewed as an acknowledgement that the TBTF problem still exists.
Actually, the Too Big to Fail banks had already exerted true political power. They knew the Minneapolis Fed activity was rigged in their favor. How did they know it was rigged? First, the Federal Reserve has actively promoted opacity in banking since 1935. Second, they didn’t have to worry about what the Minneapolis Fed was doing or would recommend because a former Goldman Sachs employee would never let transparency be discussed.
If we look at the outcome, it is possible to conclude the Too Big to Fail banks exerted true political power to get a result they wanted.
Consider for a moment the Too Big to Fail banks might want lower capital requirements than are currently being pushed by the FDIC under Thomas Hoenig. Wouldn’t it be useful for these banks to have an economic model blessed by the Bank for International Settlements and the Fed saying more bank capital results in lower growth in GDP?
This is exactly the result the Minneapolis Fed produced. The fully implemented Minneapolis Plan with higher capital requirements reduces the long-term growth rate in GDP by 70%.
Consider for a moment the Too Big to Fail banks might also want to do away with the regulations like the Volcker Rule called for under the Dodd-Frank Act. Wouldn’t it be useful for these banks to have an economic model blessed by the Bank for International Settlements and the Fed saying all these new regulations result in lower growth in GDP?
This is exactly the result the Minneapolis Fed produced. The Minneapolis Fed showed all these new regulations barely reduced the likelihood of a bailout or financial crisis, but reduced the long-term growth rate in GDP by over 25%.
Of course, the Too Big to Fail banks didn’t want transparency discussed. If it was, we would be talking about banks the Bank of England’s Chief Economist Andy Haldane calls ‘black boxes’. It would be obvious regulation is being used as a substitute for transparency and market discipline.
It would be equally obvious that restoring transparency and market discipline allows us to rollback the economic growth crushing regulations. We could do this and at the same time eliminate future bailouts.
Instead, the Too Big to Fail banks exerted true political power to have a conversation saying there is a tradeoff to be made. You can either have growth in GDP or you can have the risk of bailing out a Too Big to Fail bank. You cannot have both.
This is simply not true when the alternative of transparency is introduced to the conversation. Of course, transparency wasn’t included as true political power shaped the conversation.