Yikes, Paul Krugman Really Doesn’t Understand Dodd-Frank

[marmar]

Yikes, Paul Krugman Really Doesn’t Understand Dodd-Frank


Zach Carter
Senior Political Economy Reporter, The Huffington Post
Ben Walsh
Business Reporter, The Huffington Post


Paul Krugman does not seem to understand the very financial regulations he claims to support.

Following up on his Friday column in which the liberal economist flubbed the basic history of the financial crisis, Krugman returns Monday with a column promoting certain rules required by the 2010 Dodd-Frank legislation. These rules are a much better approach to financial reform than breaking up big banks, Krugman argues, because they will constrain risk and excess across the entire system.

The trouble for Krugman? Those tough rules would in fact require regulators to break up big banks, if they ever got around to implementing them.

“Making the breakup of big banks the be-all and end-all of reform misses the point,” Krugman writes. “What we need is regulation that limits the risks from nonbank institutions — and the 2010 financial reform tries to do just that. The way it does this is by allowing regulators to designate some firms ‘systemically important,’ meaning that, like A.I.G., their failure or the prospect thereof could threaten financial stability. Once an institution is so designated, it is subject to extra oversight and regulation.”

There’s something inherently contradictory about Krugman claiming on Friday that too big to fail is not that big a deal and insisting on Monday that it is very important to implement strong new regulations for too-big-to-fail firms. The extra Dodd-Frank oversight he applauds includes the requirement that big banks prepare “living wills” that explain to regulators how they can be safely unwound without a government bailout if they ever get into trouble. If a living will is formally rejected by the Federal Reserve as untenable, then the Federal Deposit Insurance Corp. can go about dismantling the company. ............(more)

http://www.huffingtonpost.com/entry/paul-krugman-dodd-frank-shadow-banks_us_570bd7ace4b0836057a1c658

[trumad]

1. Oh please

He understands it completely.

Under the bus Mr. Krugman.

Tick Tock

[marmar]

2. "Under the bus Mr. Krugman."

Yes. Deservedly.

[ProfessorGAC]

3. Beat Me To It, Tru

Not sure the Huff Post writer is good with ambiguity.

[trumad]

6. Either do BSer's

Soon Professor---they will all be gone from here.

Tick Tock

[think]

4. Krugman lost me when I found out he took $50k from Enron. He's just another player....

Enron Follies

By Rich Karlgaard, Forbes Staff - 2/13/2002 @ 8:00AM


We take no joy in watching Paul Krugman Paul Krugman sink with the Enron scandal and blow his Nobel chances. (Okay, we do.)

The Princeton economics professor, as it turns out, pocketed a $50,000 “advisory” fee from the oil trader in 1999. Then he wrote a puff piece in Fortune, the fashion magazine, only weeks later. Krugman now blames George W. Bush George W. Bush and Dick Cheney Dick Cheney for dragging him into this. Twice a week he stomps his feet at the gods of injustice from the op-ed pages of The New York Times.

One feels for Krugman. Three years ago he told a London interviewer he envied the life of John Maynard Keynes John Maynard Keynes . Awful times–wars, plagues and depressions–spur nervous world leaders to reach out for wise men like Keynes. The worse the economy got in the 1930s, the more Keynes bestrode Parliament like a colossus. How satisfying!...

Read more:
http://www.forbes.com/2002/02/13/0213karlgaard.html

[trumad]

7. Nah he lost you when he choose Hillary.

ME AND ENRON
Some people have accused me of an ethical lapse because I served briefly on an Enron advisory board in 1999 - even though I disclosed that relationship the only time I wrote about the company (rather favorably) for Fortune, back in May1999, and again the first time I wrote about the company (in a highly critical article) for the New York Times, which I did in January 2001. Since then I've been pretty hard on Enron, to say the least: I criticized the firm's role in the California energy crisis, and have not been kind as the firm's own problems have surfaced.

By the way, here's the piece I wrote in Fortune. It looks a bit naive now, but it's a love letter to markets, not to Enron.

So what was my relationship with Enron? I was offered a $50,000 fee for a year's participation in the advisory board, which would entail attending and presenting at two meetings, each of which would extend over two days. The year I was on the board only one meeting took place; the other was canceled because of weather.

These meetings were not about Enron business, nor were they about policy in areas closely related to Enron business; basically they were seminars on world affairs. From my point of view this was much like a paid speaking engagement, of the kind that is common for academic economists, at least those who work on issues that bear on matters of business interest, like the state of the world economy. The only difference was that in effect I had agreed to deliver several talks, and join in an extended discussion of other peoples' talks.

At the one meeting I attended, I talked about the Asian financial crisis, then still in full swing.

My critics seem to think that there was something odd about Enron's willingness to pay a mere college professor that much money. But such sums are not unusual for academic economists whose expertise is relevant to current events. And there were other academics, such as the Harvard Business School's Pankaj Ghemawat, on the panel; presumably they had the same arrangement.

Remember that this was 1999: Asia was in crisis, the world was a mess. And justifiably or not, I was regarded as an authority on that mess. I invented currency crises as an academic field, way back in 1979; anyone who wants a sense of my academic credentials should look at the Handbook of International Economics, vol. 3, and check the index. Here's my current cv .

And I wasn't an ivory-tower academic. In 1994 I had published an article in Foreign Affairs, "The myth of Asia's miracle", which was skeptical about the region's economic prospects, and seemed vindicated by the crisis that broke out three years later. In August 1998 I had advocated temporary capital controls as a way to deal with the crisis, just days before Mahathir put them into effect in Malaysia. Also in 1998 I had taken on the Japanese situation, with a series of papers that introduced the idea of inflation targeting as a way out of the trap; "It's baack: Japan's slump and the return of the liquidity trap" was published in Brookings Papers in late 1998; ever since, inflation targeting has been a central subject of debate in Japan.

Because of my role in the debates of the time, I was asked to advise various Asian and Latin American countries (offers which still come in), but declined.

I mention all this not as a matter of self-puffery, but to point out that I was not an unknown college professor. On the contrary, I was a hot property, very much in demand as a speaker to business audiences: I was routinely offered as much as $50,000 to speak to investment banks and consulting firms. They thought I might tell them something useful. For what it's worth, Citibank officials said - you can check it out with a Nexis search - that a heads-up I gave them in 1996 about the risks of an Asian currency crisis saved them hundreds of millions of dollars.

If it still seems implausible that my advice might be worth that much, think about how I have been warning about Argentina for the past year and a half; a company that had listened to me and reduced its exposure would be rather grateful, don't you think? Instead, of course, I gave the advice for free in the Times.

The point is that the money Enron offered wasn't out of line with what companies with no interest in influence-buying were offering me. You may think I was overpaid, but the market - not Enron - set those pay rates.

When I accepted the position at the New York Times, I severed the Enron connection, and also dropped any paid speaking and consulting that might violate the strict Times conflict-of-interest rules.

My critics, ignoring the fact that I have been extremely tough on Enron, seem desperate to find something unethical in all of this. Sorry: there's nothing there.

For a further note about academics and consulting, click here . Also, a note about how some people have managed to misread what I wrote.
http://www.princeton.edu/~pkrugman/enron.html

[think]

10. Krugman took the money. I could give a fuck about his lame ass excuse for doing so. ENRON

screwed many Americans. So go on an make excuses for Krugman's actions just like you do Hillary's.

I'd post an excerpt of Krugman's fluff piece for ENRON and a link but you're link in your post from Krugman doesn't work. Go ahead. Try the link.


If you want to turn a blind eye to corruption that's your problem. Not mine.

Crime in the Suites
A Look Back at the Enron Case

When Enron declared bankruptcy in December 2001 and took with it the nest eggs of thousands of employees and stockholders, the FBI field office in Houston assigned two agents to investigate. Within weeks, the number of agents and support staff assigned to the case grew to 45, many hand-picked from field offices around the country for their expertise in traversing even the most circuitous paper trails.

The case would become the largest and most complex white-collar investigation in FBI history and spawn a unique investigative task force of prosecutors, agents and analysts in Houston and Washington, D.C., each uniquely skilled at drilling deep into balance sheets and following the money. Their job: to learn how company officials perpetrated fraud on such a grand scale, build a strong criminal case, and hold accountable those responsible....

Read more:
https://www.fbi.gov/news/stories/2006/december

[hfojvt]

12. I would just note

You take your cues from Forbes.

Forbes?

I am not always a fan of Krugman. I blasted him for being a dishonest cheerleader for Obama and ATRA. But Forbes?

When they write shit like this?

"Twice a week he stomps his feet at the gods of injustice from the op-ed pages of The New York Times."

So Forbes attacks somebody who is critical of Bush on a national platform - and you go along with it?

[think]

13. Perhaps not the best source. You make a good point based on those other articles I've not read.

But Krugman most certainly took the money. He most certainly wrote a fluff piece for Enron.

Enron most certainly screwed thousands of Americans in one of the biggest white collar crimes in modern history.

[hfojvt]

14. I think his explanation makes sense

Plus a) I have not read his supposed "fluff piece", and

b) what is the timing of Krugman's payment? I mean, before Enron committed that white collar crime, they were just another energy company. I mean, I have taken money from Westar Energy (sort of - I bought their stock and sold it for a profit). They just jacked my rates (and those of others like me) by about ten percent. Does that make me complicit, and not pure like Bernie, who gets a $170,000 salary from the taxpayers? If, at some future date they pull an Enron, was I supposed to know about it in advance?

[think]

23. Krugman's area of expertise is economics and finance. ENRON was cooking their books. That doesn't

make Krugman look real competent.

Cooking the books

A report from Enron’s own board has outlined the widespread failures that led to the collapse of the energy-trading giant in America’s biggest corporate bankruptcy last December. It blames management and Andersen, Enron’s auditors, and even the board itself. Now many are asking how widespread such practices are in corporate America

~Snip~

Enron's own staff suspected that something was going on. One lawyer based in North America complained as early as September 2000 that a number of investments being introduced by Enron into one set of partnerships were “bad ones,” adding, “This is disconcerting… it might lead one to believe that the financial books at Enron are being ‘cooked' in order to eliminate a drag on earnings.” What investors around America are now asking is: Was Enron alone?...

http://www.economist.com/node/974598

Was he suppose to know they were cooking the books. No. But still giving that economics and fiance are his area of expertise and he was being paid to sit on an advisory board it appears he did little to nothing in regards to understanding what was taking place.

And no. Krugman isn't complicit nor did I claim he was.

But it's obvious he was willing to take $50K. Then write a fluff piece shortly thereafter; and within less than two years this major energy company goes into bankruptcy do to it's criminal actions involving financial .

Enron was NEVER known as a progressive corporation. They were a mega energy company. Krugman never looked back. He took the money and wrote the fluff piece while being used by ENRON to show a "progressive" economist was on their advisory board and standing firm with them.

[mythology]

25. So he was supposed to go sneak a peak at their books?

He wasn't invited to do that. If I have a contractor over to fix my dishwasher, I don't expect him to go through my underwear drawer to see if I have any pot.

[think]

26. What was Krugman hired to advise ENRON about? Dishwashers? Pot? Underwear?

Seriously. Why did ENRON hire an economist to sit on their advisory board?

[trumad]

15. What---you gonna give me a history lesson on Enron?

LOL---you BSers.

[think]

19. Laugh about corruption and pay to play politics all you want. I''d expect no less from you.

[trumad]

20. Boring!

Tick Tock

[revbones]

5. Yeah! Heaven forbid we should ever disagree with him, or his bias in some areas!

Since you don't think it's ok to disagree with anyone that was once on your side, how do you feel about today's NY Daily News Cover:

[trumad]

8. How about Bernie releasing his taxes?

His wife still working on them?

[revbones]

9. Maybe Hilary could say she was under sniper fire again to distract everyone. nt

[trumad]

16. Tick Tock

[revbones]

18. Or repeat the more current lie about Vermont guns! That might distract too! nt

[trumad]

21. Yawn.

Tick Tock

[revbones]

22. Spoken like a true Hillary follower. Doesn't matter if she lies 90% of the time does it?

That 10% of half-truths is all you need. A true cult-of-personality.

[trumad]

28. Now I'm really dozing.

Tick Tock...Tick Tock!

[revbones]

29. Exactly. Thanks for proving many points. nt

[trumad]

32. Who needs Ambien when you have BSers.

[revbones]

35. You are really invested in proving stereotypes of Hillary followers with these aren't you?

[trumad]

36. Tick Tock

[MrMickeysMom]

11. Noted smart people who use the profession "economist" after being given a prize for it...

... are supposed to base all this from understanding how America address its fair lending and imbalanced debt obligations.

He's so full of himself that he's lost on the very concept of his so-called, "expertise".

Give a BIG round of applause for this asshole, folks.

[trumad]

17. Armchair BSers...

You guys crack me up.

[yellowcanine]

24. Huh. Think I will stick with Krugman over Zach Carter. No offense, Zach, but Krugman

has a bit more credibility than you on economics.

[Hoyt]

27. Actually, I think it is Sanders and his supporters who do not understand Glass-Steagall would not

have prevented problems at AIG, Lehman Bros, G Sachs, etc.

Dodd-Frank with the Volcker rule is reasonable regulation of banks, although I personally don't care if more regulations are enacted if that make people feel better.

But Clinton also wants to impose regulations that get to the heart of those institutions not covered by GS. Sanders just wants to yell at the sky because he knows that gets his supporters excited.

[think]

31. Glass Steagall would be used to separate investment banking from commercial banking.

It's not that difficult to understand. Bernie wants to go much further than that as far as regulating and policing Wall Street's corrupt banks. But it is a big part of getting the investment gambling out of banking which it shouldn't be a part of.

And though it wasn't the direct cause of the great recession even Economic Nobel Laureate Joseph Stiglitz stated that it was one of the biggest indirect factors:

Looking Back at the Repeal of Glass-Steagall, or, How the Banks Caught Casino Fever

By Roosevelt Institute | 11.12.09

~Snip~

The result? Casino fever took over commercial banking industry. Weissman quotes Roosevelt Institute Braintruster and Nobel Prize-winner Joseph Stiglitz:

“‘Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively…It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money — people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risk-taking.”....

Read more:
http://rooseveltinstitute.org/looking-back-repeal-glass-steagall-or-how-banks-caught-casino-fever/

Ironically you sound very much like these fine fellow in regards to Glass Steagall:

Why The Glass-Steagall Myth Persists

By The Objectivist - We're members at the Ayn Rand Center, covering economics and liberty. - NOV 12, 2012 @ 10:04 AM

The growth of government intervention over the last century was built on the back of a handful of myths. A generation ago, the dominant myth was that free markets had caused the Great Depression, a falsehood ultimately debunked by economists like Milton Friedman. Today, the key myth is that financial deregulation caused the 2008 financial crisis....

Source:
http://www.forbes.com/sites/objectivist/2012/11/12/why-the-glass-steagall-myth-persists/#5655ebb22b67

[Hoyt]

37. And Dodd-Frank and the Volcker rule keeps federally insured money from being used in risky

investments. Problem is, Sanders supporters have trouble understanding that so they need to see the commercial bank on one side of the street and the investment activities on the other side. Jeeez.

[think]

39. Elizabeth Warren helped craft parts of Frank Dodd. She still advocates for a new Glass Steagall

The investment banks have no business being in regular banking.

Elizabeth Warren Champions Bill to Restore Glass-Steagall Act and Rein in Wall Street

~Snip~

The purpose of the bill is to restore economic stability to the United States by once again limiting the expansion of banking into high-risk activity and financial areas that create a conflict of interest, as indicated in the bill itself:

(1) to reduce risks to the financial system by limiting banks' ability to engage in activities other than socially valuable core banking activities;

(2) to protect taxpayers and reduce moral hazard by removing explicit and implicit government guarantees for high-risk activities outside of the core business of banking; and

(3) to eliminate conflicts of interest that arise from banks engaging in activities from which their profits are earned at the expense of their customers or clients....

Read more:
http://www.truth-out.org/buzzflash/commentary/elizabeth-warren-champions-bill-to-restore-glass-steagall-act-and-rein-in-wall-street

Is Glass Steagall the end all solution? NO. But it is one tool in that should still be part of the arsenal of tools used by our govt to protect our economy from risky behaviors on behalf of these banks.

Why would anyone trust TBTF banks that already are violating the US law on a regular basis?

There was a reason Glass Steagall was written and made into law after the great depression. It WORKED.

[Myrina]

30. Doesn't understand or is purposely obfuscating ...

[Else You Are Mad]

33. It is easy to be willfully ignorant...

When someone is looking for a cabinet position in the Hillary administration.

[Jim Lane]

34. Personalities aside, I see nothing in this thread that even attempts to refute the substance.

The HuffPo piece doesn't go after Krugman about Enron or the like. (I personally think the whole Enron thing is a bum rap on Krugman.) Instead, the piece summarizes specific arguments he makes, notes actual facts about the financial system and the provisions of Dodd-Frank, and explains why Krugman is wrong on this particular point.

The authors aren't Nobelists, but they're two experienced economic journalists. Besides, it wouldn't matter if they were ten-year-olds in Bangladesh. They're not asking to be taken on faith. They're setting forth an argument.

I found their argument persuasive. Would any of the Clinton supporters who rush to Krugman's defense care to address that argument?

[think]

38. Valid points & point taken. Krugmam ignores many facts including the fact that 11 TBTF banks failed

to provide the Fed with "living wills" that were credible. This is a big deal. Many of these banks have already failed as they needed to be bailed out.

~Snip~

...If a living will is formally rejected by the Federal Reserve as untenable, then the Federal Deposit Insurance Corp. can go about dismantling the company.

In the summer of 2014, the Fed told 11 firms that it found their living wills “not credible.” In those plans, many of the same banks that were bailed out in the financial crisis were saying they could fail safely in a future crisis, even though they are now bigger and more complex than they were in 2008.

But instead of initiating the process of dissolving the firms, the central bank just asked them to file new plans, which some did in the summer of 2015. In November, Fed Chair Janet Yellen said that regulators were asking for “very substantial changes” to these living wills....

Obviously the smell test included in Dodd Frank was used and these banks didn't pass the test. The mechanism in Dodd Frank for allowing the TBTF banks to be broken up hasn't been applied even though the criteria has been met. Instead the Fed wants to change the rules rather than adhering to the principles and rules laid out in Dodd Frank.


As for getting the thread off track on ENRON I apologize for the derailment. I'm still really pissed about learning Krugman chose to be a patsy for Enron. You might think that's a bum rap. I guess we'll have to disagree on that point. Still it did take away from the discussion and for that I am sorry as the topic is very important.

[Jim Lane]

40. Thanks for your response. Krugman has a limited space in his column so he has to omit some facts.

Nevertheless, in this instance, I think he went beyond just "didn't fit a complete chapter of an Economics text into an op-ed column" and was simply misleading.

I've learned quite a bit about economics from reading his columns, but that doesn't mean he's perfect.