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Financial Reform Newsletter: Why Is It So Important to Avoid Another Financial Crash? & More

Why Is It So Important to Avoid Another Financial Crash? Sure, Avoiding Horrific Human Suffering, But Also the Great Recession is “Worse than the 1930s” and the US Has Little Capacity to Respond to the Another Crash

 

There’s the obvious reason:  to avoid the horrific human, social, economic and political costs from tens of millions of Americans losing their jobs, homes, savings and so much more.  That alone should be a good enough reason to do whatever we have to do to avoid another crash. 

 

But there’s another big reason:  the economic aftershocks of the crash continue to this day and will soon be worse than the Great Depression.  This is the finding of a recent academic paper that Matt O’Brien at the Washington Post reported on: 

 

“[W]hile the economy never experienced the type of complete collapse in 2008 that it did in 1929, the recovery has been so much slower this time around that it won’t be long until our total growth since the start of the crisis will be worse than it was at this point of the Great Depression.”

 

The recovery has been so much slower because fiscal and monetary policies have not been aggressive enough, primarily due to political constraints.  The result is that too many Americans are still unemployed, underemployed or employed with stagnant wages.  Too many are also struggling under staggering amounts of debt, including 44 million Americans with a shockingly high student loan debt burden of $1.3 trillion.  This ongoing economic calamity, which is likely to continue for a number of years, is upending the country socially and politically, as well as economically. 

 

There is yet another reason:  the U.S. has little fiscal, monetary and political capacity to respond to another crash, making it imperative to avoid it in the first place.  While we know this is true based on the deficits and debt that result in underfunding all of America’s other priorities (fiscal), the zero interest rate policy and $4+ trillion balance sheet of the Fed (monetary) and the political currents whipsawing the American electorate, a new study of macroeconomic policy has also demonstrated this.  Professors Cristina and David Romer from U Cal Berkeley show that “the degree of fiscal and monetary policy space prior to financial distress …. greatly affects the aftermath of crises.”  In English, without fiscal and monetary space to implement sufficiently aggressive policies to respond to a crash, the worse the crash is.  That is why we have said that the next crash will likely be worse than the last one: the country’s ability to respond to it is much, much more limited than it was in 2008-2009. 

 

Better Markets’ Steve Hall Delivers Warning That Wave of Deregulation Will Lead to Another Financial Crisis, Worse Than 2008

Offering a warning that the country is facing a major wave of financial deregulation that will increase the likelihood and severity of another financial crisis and inflict devastating damage on the country, last week Better Markets Legal Director and Securities Specialist Steve Hall testified before the Maryland Consumer Financial Protection Commission. 

 

Between the GOP Congress and the Trump Administration, the landscape at the federal level has increasingly embraced deregulation and has focused on undoing many of the common sense financial protection rules put in place following the 2008 financial crisis.  Therefore, the opportunity to speak to and work on these issues at the state level is a welcome opportunity that offers the potential for new ideas and new strategies to stop some of this mindless deregulation.

 

Mr. Hall’s testimony focused on the dangers posed by deregulation and the myths on which the deregulatory push is based such as the false choice between regulation and growth, and that regulation has hurt banks and the economy.  He also discussed specific policies that are being pursued that pose a danger to consumers such as killing the Department of Labor’s fiduciary “best interest” rule and efforts to rein in the Financial Stability Oversight Council. He concluded by offering some strategies on how to fight back and resist the efforts.

 

Mr. Hall’s testimony can be found here, and you can watch the video of his testimony and the entire hearing here.  

In Another Threat to Common Sense Financial Rules Necessary to Protect Main Street from Wall Street, Congress Now Has Broader Power to Invalidate Them

In a significant and troubling step that will increase the already broad power that Congress has under the Congressional Review Act (CRA) to invalidate agency rules, the GAO announced last week its determination that “Interagency Guidance on Leveraged Lending” was subject to the CRA.

 

The Guidance was issued in 2013 by banking regulators to address the heightened risks posed by leveraged loans—large loans to corporate already-indebted borrowers for special transactions such as mergers and acquisitions.  These are often junk bonds.  Specifically, the Guidance outlined the regulators’ expectations for the prudent handling of leveraged loans, including underwriting standards, risk-ratings, and credit management.   However, earlier this year, the Treasury Department under the Trump Administration criticized the Guidance as restricting the flow of credit to the economy, and a senator asked the GAO to determine whether the Guidance was a “rule” within the meaning of the CRA.  The GAO decided that the Guidance was a “rule” subject to the CRA, notably concluding that even though such general statements of policy are exempt from the notice and comment rulemaking requirements of the Administrative Procedure Act, they still fall under the CRA, which has narrower exclusions.

 

This matters a great deal for several reasons.  First, because the CRA requires all rules to be submitted to Congress before they can take effect, and the Guidance was never submitted for CRA review, the GAO’s determination casts doubt on whether the Guidance is still, or ever was, effective.  Second, it means that Congress now can pass a resolution of disapproval under the CRA invalidating any agency’s guidance and not just rules that were finalized pursuant to the Administrative Procedures Act (APA).  Third, even though agency guidance is most often issued due to industry requests for clarification, this decision is going to chill agency guidance, leaving companies and the public to guess how agencies will interpret or implement laws and rules.  Ironically, the likely unintended result will almost certainly be more regulation by enforcement action.  Fourth, once a rule or guidance is disapproved under the CRA, the agency is prohibited from revisiting the subject matter or issuing any future rules or guidance on the subject unless Congress specifically authorizes it.  Therefore, because passing legislation almost always takes 60 votes in the Senate and CRA disapproval only requires majority vote, such prohibitions are likely to be virtually permanent.

 

Finally, and more broadly, the GAO’s determination strengthens the hand of the special interests who want Congress to have the broadest possible power to kill regulations—and now guidance— of their industry that they don’t like no matter how important or necessary they are to protect the financial security or health and safety of the American public.  This is going to politicize the rulemaking process and empower lobbyists to use their influence – often unseen and unaccountable – to undo rules that were passed according to a law (the APA) that requires an open process and the input of the public.

 

For example, the most recent example is the demise of the CFPB’s rule that was designed to protect financial consumers’ right to join with other victims of fraud and abuse and seek fair compensation in court, as our President and CEO Dennis Kelleher discussed on C-Span here:

 


 

That rulemaking took almost five years and involved a massive amount of work and outreach to all stakeholders, including most prominently the industry.  Congressional Republicans, heavily lobbied by the financial industry, voted via the CRA to overturn the rule without a single hearing or input from anyone in open, public hearings.  That wasn’t a decision on the merits, but, at best, was based on political arguments and talking points supplied by the special interests. 

 

Most remarkably, the use of the CRA has exploded during this Administration.  In fact, the CRA was used only once before the Trump administration (during the Clinton administration in the 1990s), but it has been used 15 times now in just the first few months of the Trump administration.  The result is that special interest lobbyists and campaign contributors get elected officials to kill rules enacted by experts at agencies after an inclusive and open process.  That’s just wrong. 

 

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