PAUL JAY: 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: 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.