How Does Politics Impact Bank Regulation?

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March 14 (Bloomberg) -- Columbia Business School Finance Professor Charles Calomiris discusses politics and banking rules on Bloomberg Television's “Bloomberg Surveillance.” (Source: Bloomberg)

Seven years and -- in the financial crisis, smart people are thinking hard as to why we are fragile by design.

Charles calomiris, truly one of the nation's authorities of how we got into this mess.

You focus on the politics of the moment.

Is the politics of 2014 any different from the politics of the spring of 2007? absolutely.

It is different in a lot of ways.

One of the key points we make in the book is that the merger wave of banks in the 1990's and the 2000's and the political alliances that were forged really were important for promoting the government's was for subsidizing mortgage risk.

And that this really did make a difference in the 1990's and the 2000's. the differences, that merger wave has already happened.

Politics going forward will be different.

It is not clear that, for example, the large banks are going to be as willing to cater to the political interests -- they may just say to the lobbyists in washington, give out loans so we got to be reelected.

This time they may do a nancy reagan and just say no.

I think that is a real possibility.

Let me give you some data.

One thing we are seeing is some of the larger banks, the so-called community reinvestment ratings are going from superlative scores to just satisfactory.

We are seeing contractions of inner-city branches.

We are seeing the banks pulling back from some of the sort of political investments they made in the 1990's and the 2000's. of course, the government is reacting to that, too.

Mel watt was just appointed as the supervisor effectively a fannie and freddie, and he was -- is trying already to start doing things, pushing back in the direction of using that leverage to try to expand subsidization of housing credits.

As we head toward the election, what will the banks want versus what washington wants?

You know, i don't know what washington is going to want other than to continue.

The obama administration, to continue the subsidization of housing finance, especially in an election year.

Obviously the banks are in a tough position, but at some point, you pressure them so much that it is not so clear that the government has a lot of leeway to keep pushing.

So i think there really is a bit -- let me play the role of a skeptic.

Does anything really changed?

The reason i ask, if you look at fannie and freddie, which look like they will be effectively taken apart and replaced with something else.

Are we really just shuffling chairs on the deck?

I would not jump to the conclusion that fannie and freddie is going to be taken apart or replaced by something else.

We have a bipartisan agreement to do exactly that.

I don't think we do.

I think what we have is the house of representatives of vision and a senate vision and an obama administration vision and they are three different visions, as far as i can tell.

What we mean is we have gridlock, so the status quo continues.

Now the key issue until the next election, maybe until 2016, is how is the conservatorship being run?

You quote famed economist george the norstar -- george bernard shaw -- the government that robs peter to pay paul will depend on the -- always had the support of paul.

Kauffman says the way to fix this is have banks have skin in the game.

Jamie dimon, brian moynihan, the guy running barclays right now, do they have more skin in the game now or is it just business as usual?

They do have more skin in the game from every perspective.

Their capital ratios are much higher.

Of course, dodd-frank requires them to have specific skin in the game in a new way.

But one story that really fell off the pages that people have not focused on -- the volcker rule limits what banks can do in setting up the equity funds that they have been setting up before.

You know what the exemption for that is?

Housing related investments.

In other words, at every turn, if you go down all the reforms, what you see is the government always creating this exception because real estate is such a politically charged area.

But it is also a very high risk area.

In other words, we learned nothing.

We really have not progressed.

Just going back to where we were.

One of the insights of the book is that political coalitions and the powers of those coalitions are very robust.

Politicians like to make claims about reform.

A massive shout out to charles calomiris -- you before anybody said greece would make it.

You advised the greek government.

Greece has come back, spain has come back.

What is next for greece?

I can't say i am that optimistic, to be honest.

Greece is turning the corner on the primary surplus, and there are a lot of good things happening.

But i hate to be throwing cold

This text has been automatically generated. It may not be 100% accurate.


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