Posted in CMBS, Commercial Mortgage Finance, Credit Crisis, CREFC, DechertOnPoint, Regulatory, Risk Retention, Securitization
With apologies to George Dangerfield, who published The Strange Death of Liberal England in
1935chronicling the collapse
of the British Liberal Party prior to World War I, I’m borrowing his title for
this commentary. Okay, bear with me. Regrettably, we may be
witnessing something happening to our banking system which is somewhat reminiscent
of the death throes of one of England’s great political parties. The Liberal
Party expired in the years leading up to the Great War not because of some
single momentous and metamorphic event, but because of a series of modest
crises, each in its own right small bore which, at the time, was not viewed as
terribly consequential. It failed because of the stultifying, dismal and
confused responses of the Liberals to these events. In the end, the party
became untenable as a party of government. Let’s hope no one writes that
book about our banking system in the years to come.
Our enormously complex, interdependent, vibrant,
entrepreneurial, adaptive, world girding and dynamic U.S. banking system has
played a seminal and still critical role in making this economy succeed.
It is now under assault by large segments of our political elites and their
attendant and enabling (self-identified) intelligencia. This fraternity
inspired by the twin idee fixe that the Great Recession was caused by the failures
and failing, economic, structural and ethical of our banking system and a
fabulist conviction that banking can be “fixed.” This is a chimerical
crusade to overturn the business cycle. Fruitless and dangerous.
Dodd-Frank and its progeny in the United States and
the echoes of Dodd-Frank across pretty much all of the western world constitute
a complex symphony of risk mitigation strategies. A symphony conducted
with, as we’ve said so often in this commentary, really striking indifference
to the limitation of our knowledge. The hubris is striking. The
notion that right-thinking people, infused with certainty and a layman’s grasp
of the complex theoretical musings of a largely left-of-center clique of
economists emboldened by a powerful and un-self-aware confirmation bias, is
astounding.
Once the Kool-Aid is imbibed, it stands to reason that
we can transform our banking system into something which serves the public
good, always gets it right, which is dynamic but not self-interested, and which
is “fair” and corporalistic. A city-on-the-hill type of system, a perfect
utility. It is also, at its foundation, an expression of the high
school garage hobbyist tinkering with dad’s hi-fi. It is a fanciful
notion that our banking system and broader economy are Newtonian constructs
where, in a steampunk sort of way, levers can be pulled and specific outcomes
obtained. Not only do our policy elites not really know which levers to
pull, but they have no clue as to what happens when they pull them. To
me, the mascot of this reality is that poor benighted DEP inspector in the
first Ghostbusters movie (“Shut this damn thing down now.”). Chaos
ensued.
From such conviction, from such certainty, comes
rules, bright lines and almost 24,000 new pages in the Federal Register just
from Dodd-Frank alone.
Don’t these folks get it that they might have it wrong?
Do they have no sense of history? Do they have no concern, perhaps deeply
buried under the armor of their conviction that they are less Dr. Jonas Salk
and more Nostradamus, the famous plague doctor (and predictor of all sorts of
silly things – how perfect!) that bled his sick patient and when the patient
got sicker, bled him more? (And when the patient dies, confesses that he
really wished that he bled him earlier.)
We have talked about, and will certainly come back and
talk about some of the laws, regulations and regulatory initiatives in more
detail, but we thought it time to just stop and look at the accretion of rules,
regulations and initiatives designed to make banking safer. Some of these
actually may achieve in some measure their intended results, but the
accumulation of unintended consequences, each building on another, none perhaps
doing more than a modest amount of damage to the system, but in toto, actually managing to make the system materially less
effective, in fact, less safe.
So next week, we’ll recite this litany of woe and
remind everyone about all these many and deeply flawed regulatory initiatives
and talk about Rep. Hensarling’s Don Quixote-ish crusade to make it all go
away. But for the moment, let’s just pause and appreciate the startlingly
broad, wide and intellectually suspect scope of governmental interference and
tinkering with our banking system and market performance over the past several
years. Can we stop for a second and at least admit that bankers are not
bad people, and that banking is not an evil institution? Can we stop for
a minute and think that banking has grown and matured and has been increasingly
professionalized over the last hundred years and has actually done an awfully
good job of providing the credit (and mitigation of risk) which is the
lifeblood of our economy? Can we stop for a moment and observe that since
no system is perfect, that the perfect can be the enemy of the good, that the
cure can be worse than the disease?
To the extent all this regulatory strum und drang reduces risk, it has done so largely by simply
diminishing the efficiency and efficacy of our banking systems. Less
business, less risk! Hey, simple! That prescription apparently is
okay to the political and regulatory elites at the tiller. A poorly
functioning, ineffective and diminished banking system seems to be just fine,
thank you, if the regulatory remedy they administer can be ballyhooed as having
protected us from risk. It reminds me of the old joke about the Frenchman,
Englishman, Irishman and Russian at the Pearly Gates. St. Peter asks each
of them for a boon (I’m sure there is an equivalent version in each of the
world’s major religions, just to be totally PC about it). The Frenchman,
Englishman and Irishman all talk about how they would love to see their family
thrive, have a farm, own a vineyard, run a small business, etc. When St.
Peter asks the Russian, he pauses for a moment and says, “all through my life
my neighbor had a cow. I wish my neighbor’s cow would die.” Is
there something here about killing the neighbor’s cow?
To use a phrase coined by my good friend Cliff Rogers
of the Real Estate Roundtable, it looks like they’re trying to turn our banks
into money museums. “Look, kids. This is what money used to look
like. Don’t touch it now, it’s dangerous.” Maybe there’s a notion
here that beating up the banking system, which seems to be a path to populace
cred in modern politics, is okay because the banking system is so strong that
all this beating will really not hurt the overall economy. But hey,
remember the straw that broke the camel’s back? At some point, capital
piled on capital, regulatory restraint piled on regulatory restraint,
prudential review piled on prudential review and layer after layer of second,
third and fourth guessing will cause the whole enterprise to shudder to an
inglorious stop.
When will we know this? Well, we’ll know it when
the underlying economy begins to grind to a stop. That might be happening
right now as we speak, as we enter the 25th or 26th quarter of sub 3% growth,
after coming out of the Great Recession. I noticed a headline in the
Financial Times on the 25th:
“Europe’s Regulatory Crackdown Set to
Ease.” Europe, where an anemic banking system, long overwhelmed by
political interference, cannot support growth, is waking up to the fact that
perhaps killing the patient in order to avoid it getting a cold might not be a
grand idea. Do we have to get that bad before we have that Saul of Tarsus
moment?
And yet, we are still fighting the last war, we’re
still fighting the perceived excess risk to which the Great Recession is
broadly attributed (without, mind you, a lot of hard data to back that
up). I’m afraid that, after such a long period of anemic growth, the
regulatory response to more anemic growth is more rules. Somehow, it can
be fixed with more rules, if they would just do what we told them, all would be
fine. That worked great for all those five year plans of Russia, China
and much of the old Europe that were so popular throughout the middle of the
twentieth century, didn’t it?
And now we have an election with the only candidates
left standing all seeming to have a wildly overblown faith in the power of
state action. This is very much in accord with views of the current
tenants of the political heights and it bodes more of the same. Not
comforting. We need a break, a do over, a time out from our political
class knitting away in pursuit of one or more grand theories of banking and
economics, a break from this astonishing confidence that more rules will
produce a better system.
It’s hard to say where we go regardless of where we go
from here, except more state action, more rules, less faith in markets. Now I’m
starting to depress myself, so I’ll stop.
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