Will the GOP will bring back the 2007 era bank regulatory structure?

I.e. the regulatory structure that gave us the mid-2007 to mid-2008 banking crisis (the late 2008 crisis was also on the Fed.)

That’s what I infer from this letter sent to the Fed from an important GOP Congressman.

I have been a big critic of Dodd-Frank and wouldn’t mind seeing it repealed.  But only if other simpler and more effective regulatory changes are made.  Those might include higher bank capital requirements, getting rid of Fannie and Freddie, and/or reforming FDIC.  But as far as I can tell, the GOP is opposed to all of these actions.  Indeed the letter warns that higher capital requirements will slow economic growth.

So it looks to me like the GOP favors the regulatory system that led to the 1980s banking crisis and the 2007 banking crisis.  Am I wrong?  (I hope so.)

PS.  The letter is hard to quote from, as it’s a photo that’s difficult to copy.  But the gist of Congressman Patrick McHenry’s letter is, “Give banks liberty, or give me death.”

HT Lars Christensen

Update:  You heard it here first.  Trump will replace Mike Pence with Noam Chomsky in 2020—a better fit for his views:

When Fox News’s Bill O’Reilly challenged Mr Trump in the interview, saying “Putin’s a killer,” the president replied: “There are a lot of killers. We have a lot of killers . . . What, you think our country is so innocent?”  .  .  . ” I do respect him [Putin].”

How many times have top GOP figures had to totally disavow the embarrassing statements made by Trump over the past 12 months?



41 Responses to “Will the GOP will bring back the 2007 era bank regulatory structure?”

  1. Gravatar of Britonomist Britonomist
    5. February 2017 at 11:36

    They’re the kind of guys that want Wall St to experience a short boom while they’re in charge, and then leave the democrats to clear up the resulting mess.

  2. Gravatar of ssumner ssumner
    5. February 2017 at 11:36

    Britonomist, That’s what it looks like.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    5. February 2017 at 11:38

    Considering it took a multi-sigma negative shock in collateral values and a full year worth of panics, finished up with a combination of discretionary contractionary policies before most financial firms finally succumbed, the system in 2007 must have been pretty resilient. If you think the financial system should be able to withstand a 25% collapse in real estate and regulatory shutdown of whole sections of the market, then you might as well advocate 100% reserves.

  4. Gravatar of ssumner ssumner
    5. February 2017 at 11:43

    Kevin, Considering that the US has had three major financial crises in the past century, and Canada has had zero, maybe there is room for improvement.

    I can think of lots of sensible reforms, ending the tax subsidy for debt over equity, reforming FDIC, getting rid of fannie and freddie, making bank bonds convertible into equity in a crisis, higher capital requirements.

  5. Gravatar of Carl Carl
    5. February 2017 at 11:56

    I hadn’t read about McHenry before. I’d heard of the CHOICE Act (http://financialservices.house.gov/choice/), which as far as I understood essentially says banks can be exempted from a lot of the more restrictive regulations if they raise their capital requirements to 10%. Here’s an excerpt:

    “Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that provide limitations on mergers, consolidations, or acquisitions of assets or control, to the extent the limitations relate to capital or liquidity
    standards or concentrations of deposits or assets”

  6. Gravatar of Philo Philo
    5. February 2017 at 12:24

    What reform of the FDIC would you like to see? I would like to see it abolished, but that seems to be politically impossible. So long as it is in place (unless you have some miraculous proposal for reform), the government will have to regulate the banks, and it will do so poorly.

  7. Gravatar of ssumner ssumner
    5. February 2017 at 12:53

    Carl, I don’t know if 10% is enough, but that’s the right idea.

    Philo, Either abolish, or have all FDIC-insured deposits be 100% backed by safe assets like Treasury bonds. Then you would not need to regulate banking.

  8. Gravatar of foosion foosion
    5. February 2017 at 13:03

    Since when is does the Fed lack authority to regulate banks or is supposed to regulate based on achieving the objectives set by a new administration or is obligated to wait until a president appoints new officials to act?

    Is there actual evidence that higher capital requirements leads to slower economic growth here in America (other than for those subject to the capital requirements)? Our periodic banking crises tend to harm growth.

  9. Gravatar of foosion foosion
    5. February 2017 at 13:06

    Abolishing the FDIC risks bringing it back when a whole lot of voters get into trouble in a crisis. In light of the probability of that happening, we might as well have some structure in place in advance.

  10. Gravatar of Scott Freelander Scott Freelander
    5. February 2017 at 13:10


    Yes, I agree with this post very much and have commented similarly elsewhere. Sometimes partial deregulation is worse than no deregulation at all, and I don’t trust the competence or honesty of Trump and the Republicans. The consequences of partial deregulation within a complex system can be difficult to predict.

    I just don’t favor Rube Goldberg regulatory structures. Better to have hard and fast rules that may seem to lower efficiency by eliminating flexibility provided by human judgement, but in fact is ultimately more efficient due to the reduction of human error, regulatory capture, and lack of complexity in compliance.

    That said, I’d prefer total financial deregulation, including elimination of the FDIC, Comptroller of the Currency, the Fed role in banking and the financial sector, the SEC, FINRA, the CFTC, Freddie, Fannie, distortionary tax deductions and credits, and business and investment income taxes.

    Short of total deregulation, I favor repeal of Dodd-Frank and like the rules you mention, along with perhaps a rule that says that non-real estate investors cannot be offered a mortgage with payments that can ever exceed 1/3 verified income at the time the loan is made.

    So, I’m cautiously excited about financial deregulation, but also skeptical. I have a friend who runs a home development spec lending business, and simple repeal of Dodd-Frank would hurt the lending-side of this business, given that banks could get back into the business, but he’d still have relatively more onerous regulations on the side of raising capital. The compliance costs associated with issuing notes as a public company are much more difficult for small businesses to bear, especially for those doing business in multiple states.

  11. Gravatar of ssumner ssumner
    5. February 2017 at 14:49

    foosion, Ideally I’d like to abolish FDIC, but for the political reasons you mention it’s probably wiser to reform it. Require insured deposits to be 100% backed with safe assets like Treasuries. Uninsured deposits could offer higher returns.

  12. Gravatar of dtoh dtoh
    5. February 2017 at 15:33

    I’ve said this before, you either need to get or rid of TBTF (which won’t happen) or you need to regulate asset/equity ratios by asset class (which probably won’t happen either).

    What might be workable is to make TBTF explicit and then to be sure you wipe out equity and subordinated debt whenever the Fed has to bail out a bank. At that same time, you need to make sure that a big chunk of bank compensation is paid as equity or subordinated debt, which gets paid out over a 5 or 10 year period after retirement/termination.

    I agree that complex regs won’t work. In all likelihood they will just make the problem worse

  13. Gravatar of mbka mbka
    5. February 2017 at 16:03


    on that Trump comment on the US’s own assassins, I have never seen a president embarrass their own country in this way before. The man seems completely unaffected by his responsibility to the country.

    Another funny thing that came out with the comments of judge Robarts – Trump does not seem to understand the difference between the executive and the legislative.

  14. Gravatar of B Cole B Cole
    5. February 2017 at 16:30

    Trump has a point on US innocence:

    “From 1964 to 1973, the U.S. dropped more than two million tons of ordnance on Laos during 580,000 bombing missions—equal to a planeload of bombs every 8 minutes, 24-hours a day, for 9 years – making Laos the most heavily bombed country per capita in history. The bombings were part of the U.S. Secret War in Laos…

    Over 270 million cluster bombs were dropped on Laos during the Vietnam War…”

    Then Trump himself just approved an operation that ended up killing a lot of girls and women in Yemen.

    I thought Trump blurted out the truth in this regard.

  15. Gravatar of Jon Jon
    5. February 2017 at 16:35


    You’re being ridiculous. There is little evidence that capital requirements in the US were too low in 2007. First, there wasn’t a major wave of bank insolvencies until the Federal Reserve tightened policy in 2008.


    Second, where there were problems with capital levels–Europe particularly–it was due to the adoption of the Basil II and III capital rules. It was these that allowed “risk-weighting” to drive European capital levels as measured by the ordinary leverage ratio to very low levels. These errant policies were adopted in the US in 2013… along with epicyclic increases to capital and new complex rules about bail-in equity to mitigate the effects.


    Better to get rid of all of this nontransparent nonsense.

  16. Gravatar of E. Harding E. Harding
    5. February 2017 at 17:03

    “Trump will replace Mike Pence with Noam Chomsky in 2020—a better fit for his views:”

    -His views are correct. The thing is, Pence is a willing puppet of Trump who has close to no influence in the administration. Chomsky outright endorsed HRC. So, not happening.

    A Trump/Chomsky ticket would have a pretty clear electoral college advantage, though.

    Sumner seems to be right on the banking question. The GOP (and Trump) are controlled by finance sector Republicans.

  17. Gravatar of JMCSF JMCSF
    5. February 2017 at 18:19

    Considering that Canada has had zero financial crises in the last century (your words Scott).

    Honestly, the US should just adopt all of Canada’s policies and call it a day. Have you ever been to Canada? Their public transit is pretty good and reminds you what a first world country is like.

    Between Canada, Australia, Singapore, and Scandinavian countries, these are the “best practices” for public policy. Why can’t we just use what is working for them? I guess because politics isn’t about policy.

  18. Gravatar of foosion foosion
    5. February 2017 at 18:42

    “Why can’t we just use what is working for them?”

    Depends what you mean by working. For example, Canada may have had zero financial crises, but do its bankers make as much money as US bankers? Other countries have cheaper healthcare with as good or better quality, but do their doctors and healthcare executives make as much money as their US counterparts?

    The US system is working very well for some. They have a vast amount of influence over policy.

  19. Gravatar of Major-Freedom Major-Freedom
    5. February 2017 at 20:10


    “They’re the kind of guys that want Wall St to experience a short boom while they’re in charge, and then leave the democrats to clear up the resulting mess.”

    Ha, as if they understood business cycles?

  20. Gravatar of Major-Freedom Major-Freedom
    5. February 2017 at 20:23

    Sumner wrote:

    “I.e. the regulatory structure that gave us the mid-2007 to mid-2008 banking crisis (the late 2008 crisis was also on the Fed.)”

    Laughing at this historical revisionism. After years of blaming the banking crisis on insufficient artificial NGDP boosting, now we are told a story of two distinct 2008 banking crises, one from insufficient “good” “regulation”, and the second from insufficient inflation.

    Sumner the closeted socislist hates free markets and hates wealthy people.

  21. Gravatar of Major-Freedom Major-Freedom
    5. February 2017 at 20:36

    “How many times have top GOP figures had to totally disavow the embarrassing statements made by Trump over the past 12 months?”

    How many times have you asked this of Democrats, for example those who do not go out of their way to criticize the murderous Islamic mullahs?


  22. Gravatar of Postkey Postkey
    6. February 2017 at 00:35

    “If you flip over the rock of American foreign policy of the past century, this is what crawls out… invasions … bombings … overthrowing governments … occupations … suppressing movements for social change … assassinating political leaders … perverting elections … manipulating labor unions … manufacturing “news” … death squads … torture … biological warfare … depleted uranium … drug trafficking … mercenaries …
    It’s not a pretty picture. It’s enough to give imperialism a bad name.
    Read the full details in: Killing Hope: US Military and CIA Interventions Since World War II.”


    “Far and away the best book on the topic.” – Noam Chomsky

  23. Gravatar of Gabriel Chavez Gabriel Chavez
    6. February 2017 at 02:44

    This may be a little off-topic, but in my circle of friends, Noam Chomsky is a semi-god who can’t do or say anything wrong. What has he said or written that makes him fitted for such views?

    Finding non-progressive friends for a non-religious young person is kinda hard, BTW.

  24. Gravatar of Jose Jose
    6. February 2017 at 03:43

    Prof. Sumner, commenters above have a point, I have been reading for years in your blog that the 2007-2008 crisis could have been a “mild recession” if only the Federal Reserve had done its job correctly. Having said that, I would prefer segregation of investment banking and commercial banking, and something towards 100% reserve for deposits as a banking regulation framework, but it sounds unlikely and that is too bad…

  25. Gravatar of Postkey Postkey
    6. February 2017 at 06:15

    @Gabriel Chavez

    “What has he said or written that makes him fitted for such views?”

    You could try this?


  26. Gravatar of ssumner ssumner
    6. February 2017 at 09:09

    mbka, You said:

    “on that Trump comment on the US’s own assassins, I have never seen a president embarrass their own country in this way before. The man seems completely unaffected by his responsibility to the country.”

    Trump cares about only himself. He doesn’t care about the country.

    Jon, The banking crisis developed before the Fed tightened. In any case, we need a banking system that doesn’t fall into a major crisis every time the Fed makes a mistakes. I’m not saying it has to be higher cap. requirements, a credible plan to deal with FDIC, the GSEs and TBTF is also an option. But of course the GOP won’t do those things.

    Capital requirements are obviously a second best policy.

    Ben, If you can’t see the difference between Russia and the US, I can’t help you.

    JMCSF, Yes, I’d be pleased with any of those systems, at least compared to ours.

    Postkey, If you want to get me to read a book, the last thing you want to do is say Noam Chomsky recommended it.

    Gabriel, Check out his apologies for all the various communist regimes of the 20th century. Then check out how many people those regimes murdered.

    Jose, I always pointed out that the financial crisis began before the recession. I’ve been a consistent critic of our financial system. I can’t imagine how anyone would get the impression that I didn’t think we needed to reform our financial system. What do you expect when you have stupid policies like FDIC, TBTF, the GSEs, etc.

  27. Gravatar of Anand Anand
    6. February 2017 at 10:00

    I am not sure if Scott knows that Chomsky has always been anti-Leninist and anti-Stalinist since his childhood.

    Perhaps he should read the anarchist theory FAQ by Bryan Caplan (http://econfaculty.gmu.edu/bcaplan/anarfaq.htm).

  28. Gravatar of dwb dwb
    6. February 2017 at 11:50

    Bank capital and losses are a function of unemployment and asset values. A “banking crisis” is invariably a function of higher than expected unemployment or lower than expected asset values. To the extent you believe nominal prices, wages, or asset values (i.e. home prices) are sticky, bank capital is a function of Federal Reserve policy (sticky prices/wages/assets->unemployment). And by unexpected: Credit loss models are inherently backward looking. I can only tell you for sure what the appropriate bank capital is if you tell me what fed policy and future unemployment will be.

    There is no regulatory framework that will fix this. You cannot set up a regulatory regime that anticipates it’s own policy failure (in the form of a peevish focus on inflation in 2008 while the economy was weakening). The regulatory framework only gives gov bureaucrats, auditors, lawyers, and regulatory risk managers a means to build spreadsheets and write papers and cover their asses. Right now the Fed and OCC have banks doing CCAR (https://www.federalreserve.gov/bankinforeg/ccar.htm). It will determine to some extent how much capital banks can return to shareholders. If history repeats that scenario, banks will never fail again. But history won’t repeat. So, we will need a new law to fix the last law that didn’t work, same as it ever was.

    Unfortunately, congress and regulators are always and everywhere incented to “do something” to justify their jobs.

    Theoretically, you can insulate the economy from a few bank failures, and let banks fail. This will not work when you have a massive failure of monetary policy ala 1930s or 2007. It will not work when the Fed allows unemployment to creep up to disinflate the economy, ala 1980s. Substantial unemployment means a large number of nonperforming loans.

  29. Gravatar of Kevin Erdmann Kevin Erdmann
    6. February 2017 at 12:15


    “Jon, The banking crisis developed before the Fed tightened.”

    Where would you date Fed tightening? Where would you date the banking crisis? Where would you date the mortgage defaults that actually caused credit losses in RMBS that created the banking crisis? I would very much like to see your specific answers to those three questions.

  30. Gravatar of Christian List Christian List
    6. February 2017 at 12:20

    Sorry if I can’t follow for the moment. Wasn’t ssumner mostly against regulation? Isn’t this pretty much the point of the Mercatus Center? Isn’t deregulation one very important point of his libertarian ideology?

    Isn’t his blog mostly about the theory that the banking crisis was just a “little flew” compared to the falling NGDP expectations that followed (remember: there was no housing bubble because of EMH). Wasn’t his point all the time that falling NGDP expectations was the problem and that the correct money policy could have prevented most of the depression and stagnation that followed?

    And now all this has changed because Trump became President? Are you kidding me?

    Is this a transformation like Krugman had during the Bush years? From the reasonable Krugman of the 80s and 90s to the crazy Krugman of the 2000s? Scott come back, what are you doing?

  31. Gravatar of engineer engineer
    6. February 2017 at 14:13

    “The banking crisis developed before the Fed tightened”

    I was not aware that any commercial bank failed during the crisis. Bear sterns, AIG…etc not commercial banks…

    My understanding of the 2008 crisis…was…lots of money due to our chronic trade deficits looking for assets to buy. Wall street creating bundled mortgage products to satisfy demand and forcing/forging the credit ratings on them to ignore the true risk of the products. CDOs issued against assets which were priced based on phony risk profiles. The entire house of cards collapsed…the FED making matters worse by tightening money supply around the same time this was happening…

  32. Gravatar of Jon Jon
    6. February 2017 at 21:21


    Just three bank failures in 2007. Lower than normal. All quiet until a few months after Fed signaled tighter policy in Spring 2008. Then still a soft-blow. 2009 dramatically different. Check the facts.

  33. Gravatar of Postkey Postkey
    7. February 2017 at 00:35

    “Postkey, If you want to get me to read a book, the last thing you want to do is say Noam Chomsky recommended it.”


    Play the man, not the ball?

  34. Gravatar of ssumner ssumner
    7. February 2017 at 18:19

    Anand, I am well aware of Chomsky’s publicly stated views on the North Vietnamese government and the Khmer Rouge. The question is, are you?

    Kevin, Both the US and Canada had deep recessions in 2008-09, produced by tight money. Which one had a banking crisis, and which one did not? Which one had a banking crisis in the 1980s, and which one did not? Both had deep depressions in the early 1930s. Which one had a banking crisis in the 1930s, and which one did not. Are you noticing a pattern here? The US banking system is a mess.

    Christian, You said:

    “Sorry if I can’t follow for the moment.”

    It’s not a momentary problem, you’ve never been able to follow this blog. Go reread my old posts if you are having trouble. I only have about 100 posts criticizing our system of financial regulation, almost all pre-Trump. And yes, it’s possible for a country to have more than one thing wrong at a time.

    Jon, I’ve always said that the Great Recession made the financial crisis dramatically worse, so you are speaking to the converted. I’d say 99% of economists would complain I OVERSTATE the role of the Great Recession in the banking crisis. You and I are in the 1%. And see my reply to Kevin.

  35. Gravatar of Kevin Erdmann Kevin Erdmann
    7. February 2017 at 22:56

    Scott, I agree with you. But, I would be curious as to your answer to my questions.

  36. Gravatar of Postkey Postkey
    8. February 2017 at 01:21

    “Anand, I am well aware of Chomsky’s publicly stated views on the North Vietnamese government and the Khmer Rouge. The question is, are you?”

    You surely don’t mean this?

    ‘And most of us who were opposed to the war, especially in the early ’60’s — the war we were opposed to was the war on South Vietnam which destroyed South Vietnam’s rural society. The South was devastated. But now anyone who opposed this atrocity is regarded as having defended North Vietnam.
    . . . There was a political settlement in 1954. But in the late ’50’s the United States organized an internal repression in South Vietnam, not using its troops, but using the local apparatus it was constructing. This was a very significant and very effective campaign of violence and terrorism against the Vietminh — which was the communist-led nationalist force that fought the French. And the Vietminh at that time was adhering to the Geneva Accords, hoping that the political settlement would work out in South Vietnam.’

    Or this?
    ” . . . the main thesis is a comparison between Cambodia and East Timor. And it’s a natural comparison — massive atrocities going on in the same part of the world — the same years . . . ”

    Some background?

  37. Gravatar of ssumner ssumner
    8. February 2017 at 13:26

    Kevin, Fed tightening began around December 2007, and became severe in late 2008..

    The banking crisis began sometime in 2007.

    I don’t know the answer to your last question.

    BTW, the fact that tight money contributed to the crisis doesn’t in any way excuse our poorly designed banking system, as the Canadian example shows.

    A banking system should be able to survive 2008 style monetary policy.

    Postkey, No, I’m referring to his denial of the Cambodian Holocaust, and his claim that North Vietnam was more democratic than the United States.

  38. Gravatar of Kevin Erdmann Kevin Erdmann
    8. February 2017 at 16:31

    The causation seems to go both ways.

  39. Gravatar of ssumner ssumner
    9. February 2017 at 07:58

    Kevin, I agree.

  40. Gravatar of Anand Anand
    9. February 2017 at 09:31

    I’m pretty sure I’ve read at least 10 times what you’ve read about Chomsky’s position on Cambodia or Vietnam. That’s not a boast, since you say that you don’t find him interesting, it’s reasonable that you don’t read him much. I have also read all the rebuttals and counter-rebuttals to his position on Cambodia.

    Suffice it to say that I have a rather different view than you. Chomsky’s judgements and recounting of relevant history can be unreliable; but they’re not meant to be historical tracts and shouldn’t be read as such. Chomsky is a side dish, not the main course. Tangentially connected: Scott Alexander has a book review of Manufacturing Consent here (http://slatestarcodex.com/2015/09/11/book-review-manufacturing-consent/).

    Coming back to the main point, Trump’s point is so obviously true that it’s silly to quarrel with it. Trump is simply saying that he doesn’t care that Putin’s a killer, he’ll do deals with him. Isn’t that the very definition of realpolitik? Why should I find it even worthy of discussion? As if I didn’t know that the US (like every other state) engages in realpolitik all the time.

    Why is Trump praising Russia any worse than Trump praising Saudi Arabia? Are the Saudis not “killers”? Last I checked, Saudi Arabia is still a great US ally. Many people are concerned about Russian oligarchs’ links to Trump, but how many are are concerned about links to Saudi Arabian oligarchs, err, kings and princes? Al Waleed bin Talal has the second-highest stake in 21st Century Fox, for instance. bin Talal has even bailed out Trump twice (http://www.newyorker.com/news/john-cassidy/a-saudi-prince-burns-donald-trump). Should one then conclude that Trump is secretly doing Saudi Arabia’s bidding?

    There are enough reasons to hate Trump; one doesn’t have to resort to silly propositions.

  41. Gravatar of Postkey Postkey
    10. February 2017 at 01:10

    “Postkey, No, I’m referring to his denial of the Cambodian Holocaust, and his claim that North Vietnam was more democratic than the United States.”

    You have evidence for these two assertions?

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