Either we have forgotten which sector of the economy brought global markets to their knees in 2008, or we have succumbed to a disastrously distorted incentive structure within the political sphere.
Six years after bets gone bad at the largest financial institutions catalyzed the Great Recession in the U.S. (and abroad), policymakers have taken yet another step to gut the once spirited landmark legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Less than two weeks into their 2015 tenure, Congress took steps to weaken the act, once thought to be a critical piece of financial market legislation aimed at avoiding future financial panic and the possibility that U.S. taxpayer dollars would have to bail out our nation’s too-big-to-fail banks.
One revision to the bill, passed sweepingly in the House of Representatives, would allow Wall Street banks, until 2019, to situate their holdings of the most complex financial instruments to meet post-crisis standards — a full two years extra from the already generous extension granted by the Federal Reserve Bank.
Another measure, being chipped away, seeks to revise the Volcker-Rule limiting the amount of speculative activity a bank may pursue with its own capital — money otherwise meant to buffer against downside risk between the value of assets and liabilities.
While mitigating the risks that encapsulated the failed business models of big banks seems responsible, somehow the narrative of useful and actionable policy has pivoted on the topic of “job creation.”
Seriously?
The recession alone from 2007 to 2009 destroyed more than 7.5 million jobs in the private sector.
One could argue that not enough attention is paid to the composition and return on various forms and degrees of market intervention.
The financial crisis of 2007 to 2009 was a glaring record of unchecked market distortions that arise when incentive structures, excessive moral hazard, conflicts of interest, greed and short-sightedness plague economic decisions.
Up-front regulatory compliance costs for the biggest Wall Street institutions are merely a drop in the bucket compared to the alternative: litigation costs from anticipated criminal prosecution of white-collar crimes and the toll that a full-blown economic panic can inflict.
The Government Accountability Office, charged with conducting a cost-benefit analysis of Dodd-Frank stated: “If the cost of a future crisis is expected to be in the trillions of dollars, then the act likely would need to reduce the probability of a future financial crisis by only a small percent for its expected benefit to equal the act’s expected cost.”
Federal agencies have spent some $1.1 billion in implementing the law, the report found.
Estimates have placed the cost of the 2007-09 financial crisis to the U.S. economy and households between $12 trillion and $22 trillion — U.S. gross domestic product in 2014 was about $17 trillion. The GAO reported, however, that a thorough post-crisis analysis of total compliance costs to the nation’s largest banks has not been conducted.
What about litigation costs? A rough estimate puts both U.S. and European banks at $230 billion paid in litigation costs since 2009. What’s more, analysts from Moran Stanley reported last week that the Royal Bank of Scotland (RBS) and Barclays will pay upward of $52 billion in fines alone through 2016.
In light of these figures, it is difficult to find credence for the often advocated notion that financial market regulation and economic growth are mutually exclusive. Perhaps, the misallocation of resources — which initially underpinned the entire financial crisis in the form of sub-prime mortgage securities, CDO’s and CDS’s, but now manifests itself in fines exceeding the size of Singapore’s entire economy — is a consequence of an unchecked financial sector.
It is not government oversight or free-market private sector rein; it is how these two entities interact with each other to produce the outcome that best serves the overall well-being of society.
Don’t forget the second word in “financial services.”
Nicholas J. Mangee is an assistant professor of economics at Armstrong State University and can be reached at Nicholas.mangee@armstrong.edu.