Must Read Paul Krugman: Punks and Plutocrats

[flpoljunkie]

March 29, 2010
OP-ED COLUMNIST

Punks and Plutocrats

By PAUL KRUGMAN

Health reform is the law of the land. Next up: financial reform. But will it happen? The White House is optimistic, because it believes that Republicans won’t want to be cast as allies of Wall Street. I’m not so sure. The key question is how many senators believe that they can get away with claiming that war is peace, slavery is freedom, and regulating big banks is doing those big banks a favor.

Some background: we used to have a workable system for avoiding financial crises, resting on a combination of government guarantees and regulation. On one side, bank deposits were insured, preventing a recurrence of the immense bank runs that were a central cause of the Great Depression. On the other side, banks were tightly regulated, so that they didn’t take advantage of government guarantees by running excessive risks.

From 1980 or so onward, however, that system gradually broke down, partly because of bank deregulation, but mainly because of the rise of “shadow banking”: institutions and practices — like financing long-term investments with overnight borrowing — that recreated the risks of old-fashioned banking but weren’t covered either by guarantees or by regulation. The result, by 2007, was a financial system as vulnerable to severe crisis as the system of 1930. And the crisis came.

Now what? We have already, in effect, recreated New Deal-type guarantees: as the financial system plunged into crisis, the government stepped in to rescue troubled financial companies, so as to avoid a complete collapse. And you should bear in mind that the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets. There’s every reason to believe that this will be the rule from now on: when push comes to shove, no matter who is in power, the financial sector will be bailed out. In effect, debts of shadow banks, like deposits at conventional banks, now have a government guarantee.

The only question now is whether the financial industry will pay a price for this privilege, whether Wall Street will be obliged to behave responsibly in return for government backing. And who could be against that?

more...

http://www.nytimes.com/2010/03/29/opinion/29krugman.html?hp

[midnight]

1. Regulate.... I see that as the tool to fix this. Just do it.

[zipplewrath]

2. Before the goal posts get moved

I'm kinda curious what the "bottom line" is around DU for these reforms. After watching us "champion" a right leaning health insurance bill which was shaped around an old Dole/Baker concept with some Romneycare thrown in, I'm curious what we'll get here. Since it appears that Dodd and Lieberman will have a fair amount of influence here, not to mention that Biden has a particular track record (stemming from being from Delware, incorporation home of many a publicly traded companies) I'm curious just how "democratic" these reforms will be. Krugman has multiple columns expressing concern that it will be "reform in name only". And considering who's in charge at Treasury, one can see how he would be concerned.

[flpoljunkie]

3. A definite concern. Obama appears to be demanding more reform from Congress than Dodd.

Obama has his work cut out for him. Remember what Dick Durbin said about the banks, 'Frankly, they own the place.' There are four bank lobbyists for every member of Congress!