On the Gravitational Pull of Clearinghouses in Congress after the Financial Crisis

Lest it be assumed that the Dodd-Frank financial-reform Act, which became law in 2010, two years after the financial crisis, would render it less probable that taxpayers would again be faced with having to bail-out financial institutions even without strings attached in order to keep the financial system intact and the American economy from collapsing, Gretchen Morgenson of The New York Times wrote two years after the Act's passage that “failing to confront the too-big-to-fail question is a serious oversight.”[1] For one thing, disproportionately increasing the amount of money that the biggest banks must hold against a rainy day once again neglects the possibility that every bank is having such a day on the same day and so none of the banks will loan to other banks (i.e., the commercial paper market). When a financial system itself is sick to the extent that it cannot stand, all the heavy dominoes may topple, one after another, even though each has more support. Secondly, widening the too-big-to-fail category enables more financial institutions to engage in risky bets because the expanded net could limit any eventual downside. Sure enough, Morgenson points out that the legislation “actually widened the federal safety net for big institutions. Under the law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits.”[2] Those institutions, including the Chicago Mercantile Exchange, the Intercontinental Exchange, and the Options Clearing Corporation were even able to avoid the penalties for failure specified in the Act. The clearinghouses had successfully argued that even though only banks had been allowed to borrow from the Fed’s discount window, the clearinghouses are not financial institutions; rather, they are financial utilities. So, should they fail, they should not have to be “wound down” by regulators. This is essentially having it both ways and getting away with it. To explain this comfortable arrangement, we would need to look under the hood, so to speak, where I suspect we would find an exclusive world wherein vast private wealth is itself political power even apart from any attendant lobbying activity.

In 2011, the CME Group, the parent company of the Chicago Mercantile Exchange, made almost $3.3 billion in revenue. Craig Donohue, the CEO, received $3.9 million in compensation and held an additional $10 million worth of equity outstanding. With this kind of money comes inherent influence, politically speaking. A very large concentration of wealth has a certain mass, by analogy, that bends space itself and thus has the force of gravity on other masses. This subtle force operates on legislators and regulators too, and thus complements both the influence of lobbying and campaign contributions. Even beyond the ability or wherewithal of great wealth to reward and punish, money talks; it is respected in itself. 

So great concentrations of wealth, like giant planets warping the space nearest to them, intrinsically warp a democratic system, which facilitates the natural tendency of great masses of wealth to attract even more. Hence after the financial crisis and the TARP and Fed infusions of cash, the five largest American banks were even bigger, and thus carried more systemic risk from the vantage-point of the financial system as a whole. In other words, it was even more likely that any of those banks, should it fail, could bring the system down. Additional reserve requirements seems like a paltry means of countering this natural law of great concentrations of wealth. Given their inherent and practiced influence, it should come as no surprise that they leverage the natural law by using even elected officials to bend the space appreciably more. 

It should be no surprise, according to Sheila Bair, the former head of the Federal Deposit Insurance Corporation, that just when the managers at the clearinghouses “were drooling at the prospect of having access to loans from the Fed, top officials at the Treasury and the Fed, over the objections of the F.D.I.C.,” pushed Congress to allow the non-banks access to the Fed’s discount window as part of the Dodd-Frank Act even while saving the clearinghouses from being subject to the law’s “wind-down” requirements.[3] Approving members of Congress likely either saw the huge amount of clearinghouse wealth as impressive and thus eminently worthy of being tapped for political contributions or were already tapping. It is as the density of the wealth had a warm glow even though a cold winter. 

According to Morgenson at the time, the clearinghouses had "considerable clout in Washington. From the beginning of 2010 through [November 2012], the CME Group . . . spent $6 million on lobbying.”[4] Warping space even more by redesigning artificial contours is apparently not cheap. 

As though a rationale were needed, managers at CME argued that once their institution received Dodd-Frank’s designation of “systemically important,” the Fed “should provide access to emergency lending” and without strings.[5] Without strings! It would seem that a certain presumptuousness comes from prolonged exposure to the warped space near the immense concentrations of wealth. Not included in the Act’s penalties for failure, CME hardly deserved an “offsetting” benefit. The lack of symmetry alone is indicative of the sheer influence of great wealth. Would such wealth, as almost the entire wealth on the planet concentrated, be a black hole? No one could escape its pull! 

More realistically, when, according to Morgenson, “large and systemically important financial utilities that together trade and clear trillions of dollars in transactions appear to have won the daily double—access to federal money, without the accountability" in being wound down after failing—the rest of us can legitimately wonder how much of the Dodd-Frank Act can be relied on to protect the financial system and economy, and thus us, after the warping effect of the giant planets. Shouldn't they be pared down, given their sizable risk to the system? If so, democratic government would be less warped and thus more directly oriented to the public good. For if a government is thwarted in this role, who is going to look after our macro systems, whether they be economic, political, or societal in general? 

See Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon. 

1. Gretchen Morgenson, “One Safety Net That Needs to Shrink,” The New York Times, November 3, 2012.

2. Ibid.

3. Ibid.

4. Ibid.

U.S. Attorney General Barr's Decision on the Mueller Investigation of President Trump: On the Invisible Personal and Institutional Conflicts of Interest

On March 24, 2019, U.S. Attorney General William Barr sent to Congress his summary of Robert Mueller's report on whether President Donald Trump's 2016 campaign had colluded with the Russian government and whether the president had obstructed justice. According to Barr, Mueller had found no evidence of collusion. As for obstruction, Barr wrote that Mueller "did not draw a conclusion one way or the other as to whether the examined conduct constituted obstruction."[1] On this point, Mueller himself had written that 'while this report does not conclude that the president committed a crime, [the report] also does not exonerate him."[2] Mueller had laid out evidence and arguments on both sides of the question of obstruction, and Barr determined that the "evidence fell short of proving [that the president] illegally obstructed the Russia inquiry."[3] The New York Times went on to call this "an extra-ordinary outcome."[4] 
Barr did not detail his reasoning in deciding the matter of obstruction. According to the New York Times, he "appeared to be focusing on the question of whether investigators could prove that [President Trump] had 'corrupt intent' in instances where the available evidence about his motivations was ambiguous."[5] But in focusing on a lack of evidence that the Trump campaign reached any agreement with the Russian government on sabotaging the election, legal experts said," Barr "left out other reasons the president may have had for wanting to stymie a wide ranging investigation: It could uncover other crimes and embarrassing facts."[6] In other words, Barr's parameters may have been too narrow. 
The way Barr framed the contours for his decision might not have been an accident, given his personal conflict of interest. More important than this, I submit, is the continuing institutional conflict of interest facing the Justice Department in investigating its boss, the chief executive. After Congress had received Barr's summary, U.S. Sen. Lindsey Graham pointed on Fox News to former Attorney General Jeff Session's personal conflict of interest (Sessions had been part of Trump's campaign that was being accused of collusion with the Russians). Unfortunately, the senator mentioned neither Barr's personal conflict of interest or the broader institutional one facing the Justice Department. Such denial may have been partisan in nature, but I contend that institutional conflicts of interest tend to get a pass in American society. In the case of the Mueller investigation, Americans as a people put the conflicts of interest aside in looking forward to the conclusions from within the Department of Justice. This point, I submit, ought to be viewed as extraordinary. I turn now to the conflicts of interest.
According to The New York Times, when Barr "stepped in to make the determination," he brought "the specter of politics back into the case."[7] I submit that any Attorney General would, and I submit should trigger partisan suspicions in making a determination on a matter in which the chief executive (i.e., the president) is being investigated. 
As for the personal conflict of interest, even though Barr "had taken over the Justice Department [just a month earlier] pledging to defend its independence," he "ended up clearing a president who [had installed] him in the post."[8] This is significant not just because President Trump had been emphasizing loyalty (and dismissing the disloyal) from his subordinates in the executive branch; any pledge of independence represented a personal conflict of interest for Barr and an institutional conflict of interest for the Justice Department, as neither were legally independent of the chief executive, the boss. 
In fact, President Trump's choice of Barr was likely tied to the Mueller investigation. Barr had written a memo as a private citizen to Justice Department officials in June, 2018 insisting that special council Mueller's obstruction inquiry was "fatally misconceived." [9] A president's use of executive powers are beyond the reach of criminal law, regardless of the motive.[10] Such uses include firing a subordinate and directing the Justice Department to close a case. It is just human nature to be motivated to direct the department to close a case against the person himself. Even so, Barr argued that "Trump asking then-FBI Director James Comey to let go of the investigation into former national security advisor Michael Flynn and later firing Comey [were] within [the president's] powers as head of the executive branch." and thus not subject to being investigated, according to Trump's Attorney General before he was nominated.[11]
That Barr's memo would have gone unnoticed in the Trump administration and especially in President Trump's subsequent decision to nominate Barr for Attorney General is too incredulous to be taken seriously. In appointing Barr, the president was essentially securing his rightful control of the branch under him. This point alone gives us an indication of the gravity of the institutional (and constitutional) conflict of interest in the Justice Department investigating its boss, the president--the chief executive, which includes chief law enforcer. 
It stands to reason that none of the departments under the chief enforcer can enforce the law on the chief. I contend that President Trump was exploiting this conflict of interest to give the public the appearance of a credible investigation having been done with the president coming out clean. This appearance, if taken seriously, ignores the underlying conflict of interest that should be recognized as blatant. 
The Justice Department cannot investigate its boss, the president, without risking the extortion of the institutional (and perhaps personal) conflict of interest. That is, the executive branch investigating its boss constitutes a conflict of interest that essentially eliminates that branch as being able to perform such an investigation, at least in terms of credibility. Unfortunately, the American people ignored or dismissed the conflict of interest by relying so much on Mueller's report and Barr's subsequent determination. 

To be sure, Congressional oversight exists when another party controls the U.S. House or Senate (or both), but this renders the judgment subject to political forces, or at least as being viewed as partisan. Facing the conflict of interest within the Justice Department and the political oversight of the U.S. House, Mueller may have chosen the latter anyway, laying out whatever evidence he had for and against obstruction. He doubtlessly knew of Barr's memo, which likely reflected the attitude at the top of the department towards the investigation of any obstruction of justice. 
In general, the American people have risked a corrupting government structure in being so naive about institutional conflicts of interest within the U.S. Government. Simply put, corruptible conflicts should be deconstructed. For example, an alternative to department in the executive branch should be created or chosen when the chief executive is the subject of the investigation. Congressional oversight could be used if another party than the president's controls at least one chamber. An alternative would need to be created should Congress lack the political will to launch an oversight investigation. That this has not been done says something unfortunate about how Americans view even constitutional conflicts of interest.   

See Institutional Conflicts of Interest, available at Amazon.

1. Eli Watkins, "Barr Authored Memo Last Year Ruling Out Obstruction of Justice," CNN.com, March 24, 22019.
2.Mark Mazzetti and Carol Benner, "Mueller Finds No Trump-Russia Conspiracy but Stops Short of Exonerating President on Obstruction," The New York Times, March 24, 2019.
3. Charlie Savage, Mark Mazzetti, and Katie Benner, "Barr's Move Ignites a Debate: Is He Impartial?" The New York Times, March 26, 2019.
4. Ibid.
5. Ibid.
6. Ibid.
7. Ibid.
8. Ibid.
9.Watkins, "Barr Authored Memo."
10.Savage, Mazzetti, and Benner, "Barr's Move Ignites a Debate."
11.Watkins, "Barr Authored Memo."

Monetary and Fiscal Policy and Structural Reform: Each Had a Role to Play after the Financial Crisis

With fiscal policy hamstrung by public debt in both the E.U. and U.S., monetary policy was a major beneficiary of the financial crisis of 2008 and the ensuing state-debt crisis that stammered on at least until 2013 in Europe. Lest it be concluded that central bank policy had reached an unassailable peak of salvation, the expanded role actually made its limitations transparent, at least in financial circles.
Speaking to Charlie Rose on March 11, 2013, Jeremy Grantham of a Wall Street firm argued that the U.S. Federal Reserve Bank's extremely low interest-rate policy would be unlikely to spark an increase in employment even in the severe recession following the financial crisis. In fact, a low interest rate is a transfer of wealth from the poor to the rich. Fiscal policy, such as the Conservation Civilians Corps of U.S. President Franklin Roosevelt's New Deal in the 1930s, is a much better tool to achieve full employment. Yet even the New Deal did not have enough fire-power to bring the U.S. economy out of the Great Depression; it took the breaking out of a second world war to get America's military-industrial complex to create enough jobs. One implication is that a competitive market alone is not sufficient to reach full employment. Even though such a market can sport great efficiency if kept competitive by the enforcement of anti-trust law, natural consumption levels have been unable to spark enough jobs for full employment to be achieved. Not even low interest rates can do that, as per the decade of the 2010's. We ought to accept that a lot of fiscal stimulus is needed to achieve full employment, even if it is not optimally efficient. 
Meanwhile, Jens Weidmann, the president of the Bundesbank, argued that monetary policy in the E.U. “can only buy time at best..” He went on to say he was “a bit concerned about some of the expectations around the power and potential of monetary policy.”[1] In other words, the ECB should have gotten back to monetary policy in a stricter sense, rather than trying to spark economic growth and employment through low interest rates and buying state-government bonds.
Behind the view of interest-rate, or monetary, policy as being capable of giving us economic salvation was the paralysis of fiscal policy determination in both federal unions.  Divided government at the federal level stymied fiscal policy in the U.S. after President Obama’s insufficient “stimulus” package in 2010. In the E.U., the vetoes retained by the fiscally- and debt-conservative state governments such as Germany at the federal level through the European Council put pressure on state governments strapped fiscally to take on even more debt even just to avoid defaulting on existing debt, not to mention keeping their fiscal policy-levels sufficient that their residents would not be imperiled. Increasing debt-loads for fiscal reasons did not serve states like Greece and Spain well. Fiscal redistribution at the federal level is one of the benefits of federalism, and yet the E.U. was stymied because each state government had too much power at the federal level (quite unlike the states in the U.S. at its federal level). 
In short, much of the allure of monetary policy actually came from fiscal frustration at the federal levels of both unions. Alternatively, both fiscal and monetary policy could have been used, and pointed in the same direction: toward full employment. Using low interest rates and the issuance of debt, respectively, to pull up an economy out of severe recession and even as political coverage (in the U.S.) or leverage (in the E.U.) for needed structural reforms of a financial system and indebted states, respectively, may not have been sufficient or even smart. Taking on a corruption-induced financial system in the U.S. required a lot of political guts, which not even the Obama administration had, for the Dodd-Frank Act of 2010 did not go far enough in deconstructing the conflicts of interest in the system. Also, feeding Wall Street with infusions of government money appropriated by Congress and much more created by the Federal Reserve Bank, with no strings attached, did not make the bankers at the big banks any more willing to accept structural reforms even though they would have protected the banks by fixing the system. Not even fiscal stimulus plus low interest rates could keep the U.S. out of a severe recession, though arguably the U.S. could have entered a severe depression otherwise. Both fiscal and monetary policy and going politically after dysfunctional systems, whether that of Wall Street or those of heavily-indebted E.U. states, all must be used so none of the tools is over-relied upon and thus overused.  

See Institutional Conflicts of Interest, Essays on the Financial Crisis, and Essays on the E.U. Political Economy. All are available at Amazon.

1. Katy Barnato, “Central Banks Alone Can’t Fix Europe: Weidmann,” CNBC, March 12, 2013.