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Via Bloomberg’s Editorial Board
Janet Yellen isn’t the ingratiating type. In a closely followed speech last week, she made it plain that she disagrees with President Donald Trump and many of his officials about financial regulation. This frankness is unlikely to help her prospects of reappointment when her term as Fed chair ends in February — but it was welcome nonetheless.
Speaking at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Yellen defended in broad terms the rules that the U.S. has adopted to strengthen the financial system since the crash of 2008. She urged policy makers to remember the lessons and the dreadful costs of that crisis, and explained at length how stricter regulation had made banks and other financial institutions more resilient. She’s right: Nostalgia for the regulatory neglect that prevailed before the crash is wholly misplaced.
Yellen was also correct to say that rules still need work — but that this should be a matter of streamlining an unduly complex system, not of rolling back important safeguards.
For instance, the Volcker rule, which limits proprietary trading by banks, is too complicated and isn’t working well. But it should be mended, not scrapped, because it still makes sense to curb risky trading financed with taxpayer-guaranteed deposits. The regulations covering small and medium-sized banks are more burdensome than they need to be. The framework created by the Dodd-Frank Act can certainly be improved.
The Treasury Department’s recently unveiled deregulation plan correctly diagnoses some of the current system’s flaws — but it also proposes changes that would weaken indispensable features of the post-crash regime. In particular, it would substantially erode the requirement that banks finance their operations with more equity capital, a practice that helps them to withstand losses and continue lending in difficult times.
Indeed, if anything, Yellen understated the need to make these capital rules more effective. The U.S. financial system is stronger than it used to be, but not as strong as Yellen suggested. Although capital levels are higher than they were before the crisis, they still fall short of what would be needed to withstand another such setback — and short of what would best supporteconomic growth over the course of the business cycle. Adequate capital is the key to combining simpler and less burdensome rules with greater financial stability.
Still, Yellen set the right tone. Her speech may have failed as a job application but its thrust was correct. Improve the system, but don’t dismantle it.
Unfortunately, our current system’s pay-to-play election campaign industry is built upon polarizing voters wherein they can only make simple minded choices of electing the most vocal and aggressive candidates, rather than those best intellectually and experientially equipped to compromise, reduce polarities and optimize existing solutions – rather than re-inventing the wheel each election cycle. Trump and the current Congress is a prime example/byproduct of the exceptionally low quality output of the election campaign system that we currently have. It is unworkable, untenable, uneconomic and may well be un-survivable.
Leadership in Washington, including the FED has been a long sad story. The Yellen remarks were predictable and uninspired, but what else is possible? All of this substantially undermines and has undermined the potential of this society.
Agree with the comments above. But disagree with this Bloomberg piece. The repeal of Glass-Steagall was a huge policy error, so in this case deregulation was clearly a big mistake. But implementing Dodd-Frank and other regulation hasn’t helped or atoned for that because these new regulations have destroyed US market liquidity and sown the seeds for the next financial crisis, the one that Yellen says won’t happen in our lifetime.