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Financial Regulation and Cost Benefit Analysis for Whom?

Tuesday, 05 February 2013 13:03 By Paul Jay, The Real News Network | Video

Gerald Eptsein: Bloomberg News calls for a cost benefit analysis of financial regulations, but the question is, cost benefit for whom?

Guest: Gerald Epstein is codirector of the Political Economy Research Institute (PERI) and Professor of Economics. He received his Ph.D. in economics from Princeton University. He has published widely on a variety of progressive economic policy issues, especially in the areas of central banking and international finance, and is the editor or co-editor of six volumes.

Transcript

Paul Jay, Senior Editor, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The PERI Report, this week with Gerald Epstein, who now joins us from Amherst, Massachusetts.

Gerry is the codirector of the Political Economy Research Institute, PERI, and a professor of economics there.

Thanks very much for joining us, Gerry.

Gerald Epstein, Codirector, PERI: Thank you, Paul.

Jay: So what are you working on this week?

Epstein: Well, [unintel.] one thing that caught my attention was an editorial in the Bloomberg news that came out on Sunday that's getting a big buzz. It's calling for more cost-benefit analysis of financial regulations, the Dodd–Frank financial regulations. This is something that the banking lobby has been pushing for as one of their stalling and obstructionist tactics, saying, look, you know, you have these [unintel.] set of financial regulations, and before imposing them we need to do a cost-benefit analysis to make sure that it doesn't impose too much of a burden on the economy for the benefits.

Jay: On the economy. But I was about to ask, cost-benefit for whom?

Epstein: Yeah, that's right, cost-benefit for whom. Well, of course, they're mostly concerned about their own costs and their own benefits. But the whole point of the financial regulation is to be concerned about social costs and benefits.

So, you know, this has been a trend in Washington in the government now that has been promoted by right-wing law and economics judges and economists now for 15 or 20 years to put yet another hurdle on all kinds of regulations—environmental regulations, labor regulations, health and safety regulations, that the regulatory agencies have to go through these elaborate cost-benefit analyses. And up until now there's been no law requiring the financial regulatory agencies to do this, like the Securities and Exchange Commission or the independent institutions like the Federal Reserve. But now the tactic that's getting some support also from Democrats is to impose these kinds of rules.

Now, part of the problem is at the same time the Republicans and their Democratic allies and the bankers are cutting back on the resources going to the financial regulatory agencies. So they're trying to say, look, you have to do all these new analyses, but we're not going to give you the resources to do them. So it's obviously just an obstructionist tactic.

What was surprising was when the Bloomberg news came out in supporting it, it made it seem like it was just this commonsensical idea. The problem is this. I mean, if you look at the evolution of the Dodd–Frank law, nobody thinks that's a perfect law by any stretch of the imagination. But the fact of the matter is it went through enormous back-and-forth investigation, analysis, debate, and the rules that were put in place were put in place after a lot of discussion and analysis that suggested that these would provide benefits in the form of more financial stability, less taxpayer bailouts, that it wouldn't unduly harm the positive role that the financial system could play. So this cost-benefit analysis essentially had already been done by the legislative process.

So why put another demand that this cost-benefit analysis be done again if it's not to obstruct the system?

Jay: Well, break into it a little bit. What does that mean? Like, give us an example of what Bloomberg's talking about.

Epstein: Well, so, for example, they say, okay, look at the capital requirements that the Federal Reserve in conjunction with the Basel committee in Europe and so forth are going to put on banks. Economists have known for decades that banks have to put at risk their own capital; they have to have a substantial amount of their capital involved. If they don't, they're going to take excessive risks.

So now Bloomberg says, well, what are the costs of making banks carry more capital, and, really, what are the benefits? Well, there's reams of articles about this already been done. That's one example. Another one coming up is the Volcker rule. Again, there's been a lot of assessment of the dangers of proprietary trading the Volcker rule is meant to reduce and how that led to the financial crisis.

Jay: And just really quickly, explain proprietary trading again for people that haven't followed this.

Epstein: Sure. Proprietary trading is when banks like JPMorgan and Goldman Sachs use their banks' own capital or borrowed money to make risky bets, rather than just serving as intermediaries where they take money from depositors and lend it to corporations to build new capital. It's their own risky bets on derivatives, their shorting the housing market or buying collateralized debt obligations and so forth that led to the financial crisis.

Jay: So I guess if you—from the point of view of some of the financial institutions, there was a tremendous benefit in proprietary trading, and the cost was borne by the American public. So what the heck?

Epstein: Exactly. And that's the way they want to keep it. And this is the most important point. The presumption in this whole push for cost-benefit analysis is the presumption that the burden should be on the regulators. Rather, we should have the burden on the financial institutions who we know have already crashed the system. The burden should be on them to prove that the kinds of activities they're engaging in are safe and effective, are socially useful, and are not excessively dangerous. The whole point should be to shift the burden of proof onto them.

And interestingly, this editorial cites a paper by Eric Posner from the University of Chicago without mentioning that this paper is like a paper that Jim Crotty and I did, said there should be a financial products safety administration kind of like the Food and Drug Administration that puts the burden on the banks to say, you cannot introduce these new products like credit default swaps, collateralized debt obligations, fancy derivatives into the system until you first prove that it's safe and effective.

The whole cost-benefit analysis is backwards, putting the burden of proof on the regulators. It should be, in fact, on the banks.

Jay: Alright. Thanks a lot for joining us, Gerry.

Epstein: Thank you.

Jay: And thank you for joining us on The Real News Network.

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.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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Financial Regulation and Cost Benefit Analysis for Whom?

Tuesday, 05 February 2013 13:03 By Paul Jay, The Real News Network | Video

Gerald Eptsein: Bloomberg News calls for a cost benefit analysis of financial regulations, but the question is, cost benefit for whom?

Guest: Gerald Epstein is codirector of the Political Economy Research Institute (PERI) and Professor of Economics. He received his Ph.D. in economics from Princeton University. He has published widely on a variety of progressive economic policy issues, especially in the areas of central banking and international finance, and is the editor or co-editor of six volumes.

Transcript

Paul Jay, Senior Editor, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The PERI Report, this week with Gerald Epstein, who now joins us from Amherst, Massachusetts.

Gerry is the codirector of the Political Economy Research Institute, PERI, and a professor of economics there.

Thanks very much for joining us, Gerry.

Gerald Epstein, Codirector, PERI: Thank you, Paul.

Jay: So what are you working on this week?

Epstein: Well, [unintel.] one thing that caught my attention was an editorial in the Bloomberg news that came out on Sunday that's getting a big buzz. It's calling for more cost-benefit analysis of financial regulations, the Dodd–Frank financial regulations. This is something that the banking lobby has been pushing for as one of their stalling and obstructionist tactics, saying, look, you know, you have these [unintel.] set of financial regulations, and before imposing them we need to do a cost-benefit analysis to make sure that it doesn't impose too much of a burden on the economy for the benefits.

Jay: On the economy. But I was about to ask, cost-benefit for whom?

Epstein: Yeah, that's right, cost-benefit for whom. Well, of course, they're mostly concerned about their own costs and their own benefits. But the whole point of the financial regulation is to be concerned about social costs and benefits.

So, you know, this has been a trend in Washington in the government now that has been promoted by right-wing law and economics judges and economists now for 15 or 20 years to put yet another hurdle on all kinds of regulations—environmental regulations, labor regulations, health and safety regulations, that the regulatory agencies have to go through these elaborate cost-benefit analyses. And up until now there's been no law requiring the financial regulatory agencies to do this, like the Securities and Exchange Commission or the independent institutions like the Federal Reserve. But now the tactic that's getting some support also from Democrats is to impose these kinds of rules.

Now, part of the problem is at the same time the Republicans and their Democratic allies and the bankers are cutting back on the resources going to the financial regulatory agencies. So they're trying to say, look, you have to do all these new analyses, but we're not going to give you the resources to do them. So it's obviously just an obstructionist tactic.

What was surprising was when the Bloomberg news came out in supporting it, it made it seem like it was just this commonsensical idea. The problem is this. I mean, if you look at the evolution of the Dodd–Frank law, nobody thinks that's a perfect law by any stretch of the imagination. But the fact of the matter is it went through enormous back-and-forth investigation, analysis, debate, and the rules that were put in place were put in place after a lot of discussion and analysis that suggested that these would provide benefits in the form of more financial stability, less taxpayer bailouts, that it wouldn't unduly harm the positive role that the financial system could play. So this cost-benefit analysis essentially had already been done by the legislative process.

So why put another demand that this cost-benefit analysis be done again if it's not to obstruct the system?

Jay: Well, break into it a little bit. What does that mean? Like, give us an example of what Bloomberg's talking about.

Epstein: Well, so, for example, they say, okay, look at the capital requirements that the Federal Reserve in conjunction with the Basel committee in Europe and so forth are going to put on banks. Economists have known for decades that banks have to put at risk their own capital; they have to have a substantial amount of their capital involved. If they don't, they're going to take excessive risks.

So now Bloomberg says, well, what are the costs of making banks carry more capital, and, really, what are the benefits? Well, there's reams of articles about this already been done. That's one example. Another one coming up is the Volcker rule. Again, there's been a lot of assessment of the dangers of proprietary trading the Volcker rule is meant to reduce and how that led to the financial crisis.

Jay: And just really quickly, explain proprietary trading again for people that haven't followed this.

Epstein: Sure. Proprietary trading is when banks like JPMorgan and Goldman Sachs use their banks' own capital or borrowed money to make risky bets, rather than just serving as intermediaries where they take money from depositors and lend it to corporations to build new capital. It's their own risky bets on derivatives, their shorting the housing market or buying collateralized debt obligations and so forth that led to the financial crisis.

Jay: So I guess if you—from the point of view of some of the financial institutions, there was a tremendous benefit in proprietary trading, and the cost was borne by the American public. So what the heck?

Epstein: Exactly. And that's the way they want to keep it. And this is the most important point. The presumption in this whole push for cost-benefit analysis is the presumption that the burden should be on the regulators. Rather, we should have the burden on the financial institutions who we know have already crashed the system. The burden should be on them to prove that the kinds of activities they're engaging in are safe and effective, are socially useful, and are not excessively dangerous. The whole point should be to shift the burden of proof onto them.

And interestingly, this editorial cites a paper by Eric Posner from the University of Chicago without mentioning that this paper is like a paper that Jim Crotty and I did, said there should be a financial products safety administration kind of like the Food and Drug Administration that puts the burden on the banks to say, you cannot introduce these new products like credit default swaps, collateralized debt obligations, fancy derivatives into the system until you first prove that it's safe and effective.

The whole cost-benefit analysis is backwards, putting the burden of proof on the regulators. It should be, in fact, on the banks.

Jay: Alright. Thanks a lot for joining us, Gerry.

Epstein: Thank you.

Jay: And thank you for joining us on The Real News Network.

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.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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