Elizabeth Warren vs. CNBC Squawk Box

[c1ue]

CNBC does not come off well...

Kudos to Senator Warren for fighting the good fight.

[swgprop]

Re: Elizabeth Warren vs. CNBC Squawk Box

Kudos indeed. And does CNBC ever come off well?

[jk]

Re: Elizabeth Warren vs. CNBC Squawk Box

it's always refreshing when those industry pimps are confronted by someone who knows the history.

[mmr]

Re: Elizabeth Warren vs. CNBC Squawk Box

The most damaging excesses of the last cycle occurred outside of the regulated banking sector that would have been affected by Glass-Steagall.

Many of the largest players in the 2003-6 mortgage origination / sale / securitization "market" were non-bank broker/dealers (Goldman, Morgan Stanley, Credit Suisse, Deutsche Bank, Lehman, Countrywide, and a dozen subprime firms that no one even remembers anymore like Ameriquest). If the regulated banks (Wells Fargo, JP Morgan, and Citi) had been banned from such activities by Glass-Steagall (which is uncertain), the only impact would have been to increase the market share of the brokers and subprime "lenders" (who financed themselves by borrowing from the brokers).

The eventual costs of the bailout probably would have been the same, although more of the bailout would have been directed to the brokers instead of the banks, unless there was sufficient will to let them fail and face the consequences of cascading defaults.

As long as the national economic policy involves (repeatedly) inflating asset bubbles, someone in the financial sector (banking or non-banking) will figure out a way to borrow against / profit from the inflating assets.

Alternatively, one could just ban certain types of financial transactions outright.

Of course, it's much easier to pass largely ineffective legislation and either take credit if the problem doesn't happen to recur or find an excuse or scapegoat if it does.

[jk]

Re: Elizabeth Warren vs. CNBC Squawk Box

mmr, doesn't the fed have banking regulatory powers which could have restrained the housing bubble? and couldn't the fed have just nudged rates up a bit to brake [or break] the bubble?

[EasternBelle]

Re: Elizabeth Warren vs. CNBC Squawk Box

Good to see you are back mmr, i have missed your insights and comments.
EasternBelle

[c1ue]

Re: Elizabeth Warren vs. CNBC Squawk Box

The most damaging excesses of the last cycle occurred outside of the regulated banking sector that would have been affected by Glass-Steagall.

I absolutely agree that Glass Steagall would not have prevented the bubble, but at the same time - its repeal was very much in line with the theme you noted.

The resumption of Glass Steagall might then be considered as a signal that 'this time its different'.

Or not.

[mmr]

Re: Elizabeth Warren vs. CNBC Squawk Box

The Fed could certainly have limited the bubble by raising rates sooner coming out of the 2001 recession. Unfortunately by 2005, the bubble was mostly inflated - a stronger response in 2005 or 2006 probably would have just moved the 2008 crash up by a year.

The Fed's regulatory powers before Dodd-Frank were limited to large banks. S&L's had a different regulator (Office of Thrift Supervision) which was more lax than the Fed, broker / dealers were regulated by the SEC, and the subprime shops were regulated by no one, basically. The OTS went away after most of the large thrifts that it was supervising failed (those thrifts not only originated some of the highest risk products like option ARMs, they then held onto them rather than selling them like the investment banks did.)

After Dodd-Frank, the Fed has much more control - most of the brokers are now banks, and the Fed can now regulate any large company that it deems to pose a risk to the financial system.

Lately, the Fed has ostensibly been trying to limit the amount of risk that the banks can take on by raising the amount of capital that they're required to hold, both generally and specifically for whatever types of financial assets that the Fed considers "high risk", such as construction loans. The banks have actually cut back on some of their trading businesses for which the new rules are especially punitive (emerging market debt, some of the more arcane securitization businesses, etc.) because they can no longer earn enough of a return on the higher amount of equity that they have to hold for those businesses.

Of course, if the monetary arm of the Fed is doing whatever it can to reflate asset prices, we'll see how well the regulatory arm can do in controlling the potential damage...