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Talking Populist, Walking Plutocrat: Paul Ryan on Dodd-Frank and the Volcker Rule

Tuesday, 14 August 2012 11:48 By Gerald Epstein, Triple Crisis | News Analysis

In a little noted speech to his constituents in May, Paul Ryan decried the "crony capitalism" that he said, prompted the big bank bail-outs of 2008 (though he himself voted for the TARP, and he himself gets massive campaign contributions from big financial firms).

More surprisingly, Ryan effectively endorsed the Volcker Rule, saying: "...if you're a bank and you want to operate like some non-bank hedge fund, then don't be a bank. Don't let banks use their customer's money to do anything other than traditional banking..."

What's up with that? Well, now that Ryan has been picked to run as VP, don't expect to hear a lot more from Ryan on the benefits of the Volcker Rule type regulations. For one thing, his statement is starkly out of step with members of his party. For example, House Financial Services Committee, Spencer Bachus, Republican from Alabama recently warned that the current version of the Volcker Rule will deal "devastating" repercussions" to the economy.

These days, such claims are rarely constrained by the "facts". So let's help Bachus out. What are the costs of the Volcker Rule? And what are the benefits? We can't say for sure, but here are some rough estimates.

To start, we have to distinguish between private and social costs and benefits. We also have to identify costs to the overall economy versus a redistribution of costs and benefits between one group and another.

Begin with a recent report by Standard and Poor's ("Two Years On, Reassessing the Cost of Dodd-Frank") that puts a price tag on the costs of the Dodd-Frank financial regulations to the eight largest and most complex U.S. based banks: Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, PNC Financial Services, US Bancorp and Wells Fargo. A recent discussion by Americans For Financial Reform analysts parsed these numbers in an insightful way.

S&P estimates that Dodd-Frank will cost the big 8 anywhere from $22 billion – $34 billion per year in "pre-tax earnings". Now, let's put the numbers in perspective: S&P estimates that the total pre-tax profits of the large 8 banks will be about $100 billion in 2012. This is out of an expected total revenues of these banks for 2012 are more than $450 billion dollars. Some of these revenues are not really costs; they go to the CEO's and "rainmakers" of these banks as high pay and fat bonuses. These CEOs and rainmakers, ARE the banks. The State Comptroller of New York reports that in securities firms on Wall Street, compensation in the first half of 2011 was almost 50% of net revenues and we know that a large share of this goes to the top executives and "rainmakers" in the firm. That would raise the effective profits accruing to these banks by 25 – 50%, or up to $125 – $150 billion per year.

At most, then, the $33.5 billion cost is about 20% of profits and rainmaker incomes.

But this is a large over-estimate of costs. S&P notes that about $ 5 billion of this is to reduce the fees these banks charge credit card companies, so it is a switch of profits from one part of these banks to another part or to some other banks.

Another $6 billion is the cost of derivatives regulation that would make the derivatives market more transparent. Investigating this number more closely is instructive. S&P estimates that half of this cost will result from the banks having to lower their profit margins by 50% due to more transparency in the derivatives market when they move trading to exchanges. This roughly $3 billion of "costs" to the big banks will actually be benefits to their customers who will now have to pay lower costs to engage in derivatives transactions.

Another $4billion is to increase the costs these banks have to pay for deposit insurance, which is only reasonable since these banks risk massive bail-outs from the deposit fund, as the crisis has shown.

And certainly some, if not much of the $10 billion cost to the big banks from losing prop trading revenues will be picked up by hedge funds and other financial market players to where they would gravitate.

So that leaves us with a maximum estimates cost of less than $20 billion about half of which is due to estimated impacts of a "tough" version of the Volcker Rule.

What benefits will society reap from tough Volcker and derivatives rules?

To estimate benefits of stronger regulation, we begin with Andrew Haldane of the Bank of England: he estimates the costs of the recent financial crisis to the economy in terms not only of the cost of bail-outs, but the real costs to workers and households in terms of lost output and income due to the recession. The long term cost of the crisis could be anywhere from almost 1 to more than 3 times GDP which, on a global scale, translates into anywhere from $60 trillion to $200 trillion. For the US, the costs would translate into $15 trillion to $45 trillion. Compared to this, a loss of at most $20 billion dollars per year by several large banks, is trivially small, especially since the banks would soon figure out ways to enter other lines of business so the loss would not be permanent.

What's more, remember that many of these top 8 banks have received massive bail-outs from the government far larger than the $20 billion per year maximum they might have to pay for the Volcker Rule and Derivatives legislation. Some have estimated these subsidies to be as high as $29 trillion. (Not all of these would have gone to the 8 large banks, but these banks received a large share of these).

But the rub is that for these big 8 banks, $33 billion is real money. Current campaign laws and practices give them the incentives and the means to make sure that politicians like Paul Ryan keep walking the plutocrat walk, even if they have to do the populist talk to get elected. That's why groups like, Americans for Financial Reform, that keep calling out this hypocrisy, are so important.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Gerald Epstein

Gerald Epstein is Professor of Economics and a founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst.


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Talking Populist, Walking Plutocrat: Paul Ryan on Dodd-Frank and the Volcker Rule

Tuesday, 14 August 2012 11:48 By Gerald Epstein, Triple Crisis | News Analysis

In a little noted speech to his constituents in May, Paul Ryan decried the "crony capitalism" that he said, prompted the big bank bail-outs of 2008 (though he himself voted for the TARP, and he himself gets massive campaign contributions from big financial firms).

More surprisingly, Ryan effectively endorsed the Volcker Rule, saying: "...if you're a bank and you want to operate like some non-bank hedge fund, then don't be a bank. Don't let banks use their customer's money to do anything other than traditional banking..."

What's up with that? Well, now that Ryan has been picked to run as VP, don't expect to hear a lot more from Ryan on the benefits of the Volcker Rule type regulations. For one thing, his statement is starkly out of step with members of his party. For example, House Financial Services Committee, Spencer Bachus, Republican from Alabama recently warned that the current version of the Volcker Rule will deal "devastating" repercussions" to the economy.

These days, such claims are rarely constrained by the "facts". So let's help Bachus out. What are the costs of the Volcker Rule? And what are the benefits? We can't say for sure, but here are some rough estimates.

To start, we have to distinguish between private and social costs and benefits. We also have to identify costs to the overall economy versus a redistribution of costs and benefits between one group and another.

Begin with a recent report by Standard and Poor's ("Two Years On, Reassessing the Cost of Dodd-Frank") that puts a price tag on the costs of the Dodd-Frank financial regulations to the eight largest and most complex U.S. based banks: Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, PNC Financial Services, US Bancorp and Wells Fargo. A recent discussion by Americans For Financial Reform analysts parsed these numbers in an insightful way.

S&P estimates that Dodd-Frank will cost the big 8 anywhere from $22 billion – $34 billion per year in "pre-tax earnings". Now, let's put the numbers in perspective: S&P estimates that the total pre-tax profits of the large 8 banks will be about $100 billion in 2012. This is out of an expected total revenues of these banks for 2012 are more than $450 billion dollars. Some of these revenues are not really costs; they go to the CEO's and "rainmakers" of these banks as high pay and fat bonuses. These CEOs and rainmakers, ARE the banks. The State Comptroller of New York reports that in securities firms on Wall Street, compensation in the first half of 2011 was almost 50% of net revenues and we know that a large share of this goes to the top executives and "rainmakers" in the firm. That would raise the effective profits accruing to these banks by 25 – 50%, or up to $125 – $150 billion per year.

At most, then, the $33.5 billion cost is about 20% of profits and rainmaker incomes.

But this is a large over-estimate of costs. S&P notes that about $ 5 billion of this is to reduce the fees these banks charge credit card companies, so it is a switch of profits from one part of these banks to another part or to some other banks.

Another $6 billion is the cost of derivatives regulation that would make the derivatives market more transparent. Investigating this number more closely is instructive. S&P estimates that half of this cost will result from the banks having to lower their profit margins by 50% due to more transparency in the derivatives market when they move trading to exchanges. This roughly $3 billion of "costs" to the big banks will actually be benefits to their customers who will now have to pay lower costs to engage in derivatives transactions.

Another $4billion is to increase the costs these banks have to pay for deposit insurance, which is only reasonable since these banks risk massive bail-outs from the deposit fund, as the crisis has shown.

And certainly some, if not much of the $10 billion cost to the big banks from losing prop trading revenues will be picked up by hedge funds and other financial market players to where they would gravitate.

So that leaves us with a maximum estimates cost of less than $20 billion about half of which is due to estimated impacts of a "tough" version of the Volcker Rule.

What benefits will society reap from tough Volcker and derivatives rules?

To estimate benefits of stronger regulation, we begin with Andrew Haldane of the Bank of England: he estimates the costs of the recent financial crisis to the economy in terms not only of the cost of bail-outs, but the real costs to workers and households in terms of lost output and income due to the recession. The long term cost of the crisis could be anywhere from almost 1 to more than 3 times GDP which, on a global scale, translates into anywhere from $60 trillion to $200 trillion. For the US, the costs would translate into $15 trillion to $45 trillion. Compared to this, a loss of at most $20 billion dollars per year by several large banks, is trivially small, especially since the banks would soon figure out ways to enter other lines of business so the loss would not be permanent.

What's more, remember that many of these top 8 banks have received massive bail-outs from the government far larger than the $20 billion per year maximum they might have to pay for the Volcker Rule and Derivatives legislation. Some have estimated these subsidies to be as high as $29 trillion. (Not all of these would have gone to the 8 large banks, but these banks received a large share of these).

But the rub is that for these big 8 banks, $33 billion is real money. Current campaign laws and practices give them the incentives and the means to make sure that politicians like Paul Ryan keep walking the plutocrat walk, even if they have to do the populist talk to get elected. That's why groups like, Americans for Financial Reform, that keep calling out this hypocrisy, are so important.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Gerald Epstein

Gerald Epstein is Professor of Economics and a founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst.


Hide Comments

blog comments powered by Disqus