Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

Nate Silver predicts how the argument over banking reform will play out:

From a 30,000-foot view, the debate will be between the Volckerists and the Summersists, with the Volckerists arguing that large financial institutions need to be broken up — probably through something resembling a modern Glass-Steagall Act — and the Summersists arguing instead for more extensive regulations.

I don’t understand.  Why do I have to choose?  These aren’t mutually exclusive, after all.  Tightly regulated small banks seem like the sector to have come through last year’s meltdown in the best shape.

In any case, Yves Smith reminds us of the obvious: when the crisis hit last year, the pure investment banks fared pretty poorly:

Remember, Morgan Stanley and Goldman, both pure investment banks as of last year, also nearly failed, and Merrill, Lehman, and Bear perished….The industry had already become so concentrated (and levered) that it had become more failure prone. So merely separating commercial banking and investment banking is not sufficient; you have to do something about the risk taking of capital market players.

….And the elephant in the room is derivatives. The big players have massive OTC derivatives exposures. You need a really big balance sheet to provide OTC derivatives cost effectively….The books are large, and most exposures are hedged dynamically.

There are lots of regulations I’d like to see implemented, but if I had a choice I think I’d trade every single one of them for a comprehensive set of restrictions on leverage.  Stronger capital adequacy standards might do part of the trick, but what I’d really like to see is some kind of flat, systemwide restriction on the amount of borrowed money (as well as the tenor of the borrowing) that both individuals and institutions are allowed to apply to asset purchases.

The credit bubble of the past eight years could never have taken off if it weren’t for the huge chain of increased leverage at every step along the way.  At the individual level, mortgage loans were geared up when down payments went from 20% to 10% to 3% to zero.  The loans were then securitized and sold off so they didn’t count against bank capital requirements.  The loan securities were turned into CDOs that got more complex over time and hid ever more stupendous amounts of built-in leverage.  The super-senior tranches were insured via AAA credit default swaps and moved off the balance sheet entirely.  And all that came on top of loosened capital adequacy requirements from the FDIC and the Fed.  (Basel II had the same effect in Europe.)

When you multiply it all out, how much did leverage increase throughout the financial system over the past decade?  I’m not sure anyone has any idea.  But without it, the mortgage market doesn’t take off, the derivative market doesn’t take off, and in 2008 the banking system suffers only a minor flesh wound when a small regional housing bubble bursts.

I’m happy to be corrected on this point, but I’m pretty sure that, even combined, all the other financial pathologies we’ve identified recently wouldn’t have caused more than a few hiccups if not for the massively increased application of leverage we experienced over the past ten years.  That’s the key pathology, and if it’s rooted out and controlled everywhere and in every guise, we could probably skip most of the other stuff.

Unfortunately, it’s not really clear how to do this.  Deleveraging from our current heights will take years even under the best circumstances, and leverage shows up in so many different forms than I’m not sure how you can write rules broad enough to keep it under control.  And God knows, since leverage is the common key to big paydays almost everywhere, serious rules to curb it would be bitterly opposed by every financial lobbyist in the country.  But we should at least try.  A decade after the collapse of LTCM and a year after the collapse of the planet, we should have learned at least that much.

WE'LL BE BLUNT

It is astonishingly hard keeping a newsroom afloat these days, and we need to raise $253,000 in online donations quickly, by October 7.

The short of it: Last year, we had to cut $1 million from our budget so we could have any chance of breaking even by the time our fiscal year ended in June. And despite a huge rally from so many of you leading up to the deadline, we still came up a bit short on the whole. We can’t let that happen again. We have no wiggle room to begin with, and now we have a hole to dig out of.

Readers also told us to just give it to you straight when we need to ask for your support, and seeing how matter-of-factly explaining our inner workings, our challenges and finances, can bring more of you in has been a real silver lining. So our online membership lead, Brian, lays it all out for you in his personal, insider account (that literally puts his skin in the game!) of how urgent things are right now.

The upshot: Being able to rally $253,000 in donations over these next few weeks is vitally important simply because it is the number that keeps us right on track, helping make sure we don't end up with a bigger gap than can be filled again, helping us avoid any significant (and knowable) cash-flow crunches for now. We used to be more nonchalant about coming up short this time of year, thinking we can make it by the time June rolls around. Not anymore.

Because the in-depth journalism on underreported beats and unique perspectives on the daily news you turn to Mother Jones for is only possible because readers fund us. Corporations and powerful people with deep pockets will never sustain the type of journalism we exist to do. The only investors who won’t let independent, investigative journalism down are the people who actually care about its future—you.

And we need readers to show up for us big time—again.

Getting just 10 percent of the people who care enough about our work to be reading this blurb to part with a few bucks would be utterly transformative for us, and that's very much what we need to keep charging hard in this financially uncertain, high-stakes year.

If you can right now, please support the journalism you get from Mother Jones with a donation at whatever amount works for you. And please do it now, before you move on to whatever you're about to do next and think maybe you'll get to it later, because every gift matters and we really need to see a strong response if we're going to raise the $253,000 we need in less than three weeks.

payment methods

WE'LL BE BLUNT

It is astonishingly hard keeping a newsroom afloat these days, and we need to raise $253,000 in online donations quickly, by October 7.

The short of it: Last year, we had to cut $1 million from our budget so we could have any chance of breaking even by the time our fiscal year ended in June. And despite a huge rally from so many of you leading up to the deadline, we still came up a bit short on the whole. We can’t let that happen again. We have no wiggle room to begin with, and now we have a hole to dig out of.

Readers also told us to just give it to you straight when we need to ask for your support, and seeing how matter-of-factly explaining our inner workings, our challenges and finances, can bring more of you in has been a real silver lining. So our online membership lead, Brian, lays it all out for you in his personal, insider account (that literally puts his skin in the game!) of how urgent things are right now.

The upshot: Being able to rally $253,000 in donations over these next few weeks is vitally important simply because it is the number that keeps us right on track, helping make sure we don't end up with a bigger gap than can be filled again, helping us avoid any significant (and knowable) cash-flow crunches for now. We used to be more nonchalant about coming up short this time of year, thinking we can make it by the time June rolls around. Not anymore.

Because the in-depth journalism on underreported beats and unique perspectives on the daily news you turn to Mother Jones for is only possible because readers fund us. Corporations and powerful people with deep pockets will never sustain the type of journalism we exist to do. The only investors who won’t let independent, investigative journalism down are the people who actually care about its future—you.

And we need readers to show up for us big time—again.

Getting just 10 percent of the people who care enough about our work to be reading this blurb to part with a few bucks would be utterly transformative for us, and that's very much what we need to keep charging hard in this financially uncertain, high-stakes year.

If you can right now, please support the journalism you get from Mother Jones with a donation at whatever amount works for you. And please do it now, before you move on to whatever you're about to do next and think maybe you'll get to it later, because every gift matters and we really need to see a strong response if we're going to raise the $253,000 we need in less than three weeks.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate