British Open Economic Debate Ahead of 2015 Election

The chancellor of the Exchequer, George Osborne, on Monday promised more austerity and further welfare cuts while warning that the task of repairing government finances was “not even half-done.”

That vow followed a call on Sunday by Ed Miliband, the Labour leader and head of the opposition, for better protection for low-wage workers.

Only a year ago, Britain faced the risk of a return to recession, and Mr. Osborne’s austerity program was getting much of the blame. But Britain is now expected to be one of the fastest growing advanced economies in 2014, and that turnaround has left political parties scrambling for advantage at the start of the new year.

While the economic uptick is good news for the Conservative government, led by Prime Minister David Cameron, Mr. Osborne warned against a “dangerous new complacency,” arguing that, if given the chance, the opposition Labour Party would squander the gains made rather than consolidate them.

Despite its claims that austerity has laid the foundation for recovery, the government was put on the defensive late last year when the Labour Party campaigned over the cost-of-living squeeze felt by many voters whose pay increases have lagged behind big jumps in energy and other bills.

Mr. Miliband, writing in the Independent newspaper on Sunday, called for tougher action against unscrupulous firms that he said exploit cheap labor.

Calling for stiffer fines for companies that breach minimum wage laws and a ban on recruitment agencies hiring only foreign workers, Mr. Miliband also sought to defuse the debate over immigration and worries that workers from Eastern Europe were undercutting pay levels.

“Unless we act to change our economy, low-skill immigration risks making the problems of the cost of living crisis worse for those at the sharp end,” Mr. Miliband wrote. “It isn’t prejudiced to believe that.”

Mr. Osborne, speaking on Monday at a factory in Birmingham, sought to put the focus firmly back on deficit reduction, asserting that his economic program “is working,” but that an additional £25 billion in spending cuts will be needed after the next elections, due in May 2015, including £12 billion from the welfare budget.

The speech effectively challenged Mr. Osborne’s opponents to say whether they would match his target and, if so, how they would achieve it — if not through restricting welfare payments.

Mr. Osborne highlighted some potential welfare savings including cuts to housing benefits for people younger than 25, and the new restrictions on subsidized housing for those over certain salary thresholds.

Yet, on Sunday Mr. Cameron made clear that significant increases in the state pension will continue, insulating many older people from the squeeze on public spending. Political parties are wary of upsetting retired people because they tend to vote more than other age groups.

Labour countered Monday that it would focus more on growth as a way to reduce the scale of cuts. “We will get the deficit down in a fair way,” Labour’s finance spokesman, Ed Balls, said in a statement. “We know that the way to mitigate the scale of the cuts needed is to earn and grow our way to higher living standards for all.”

Meanwhile, Nick Clegg, leader of the Liberal Democrats, the junior party in the coalition government, distanced himself from Mr. Osborne’s comments on welfare. The Conservatives are making a “monumental mistake” in a remorseless search for cuts and in focusing the burden of consolidation on the working poor, Mr. Clegg, who is deputy prime minister, said at a news conference on Monday in London.

Although Britain’s next general election is more than a year away, elections for the European Parliament in May this year will provide an earlier test of the parties’ relative popularity with the British public.

As the general election approaches, and with opinion polls pointing to an inconclusive outcome, Mr. Clegg’s party is trying to distinguish its image from that of the Conservatives.

Letters: The Carbon Tax Debate

To the Editor:

N. Gregory Mankiw’s compelling case for a revenue-neutral carbon tax (“A Carbon Fee That America Could Live With,” Economic View, Sept. 1) was timely, as House Republicans will soon hold a hearing on climate change. Will this be a serious, practical examination of the issue, or just an excuse to attack President Obama’s climate policies for the midterm elections?

We shall see. But if it’s the former, Professor Mankiw’s proposal should be the star of the show. A truly revenue-neutral carbon tax would combine the proper roles of government and the private sector to get us moving away from fossil fuels.

Conservatives should like it because it does not grow government and would open the door to cutting back some inefficient regulations and subsidies. Liberals should like it because it would incentivize environmentally beneficial behavior without burdening the poor.

RICK KNIGHT

Brookfield, Ill., Aug. 31

The writer is a volunteer with the Citizens Climate Lobby.

To the Editor:

In his column, N. Gregory Mankiw argued for a carbon tax that would require offsetting reductions in other taxes.

But in doing so, he was dismissive of changes in societal values and regulation as paths to reduced carbon emissions. Such paths have been effective in other arenas — curtailing the use of tobacco, for example. And when it comes to gasoline use, social values about driving are already changing in an environment-saving direction, especially among young people.

So instead of dismissing those approaches, I would rather ask, “Where is the leadership in government, in the private sector, and in the media, to help make greenhouse gases as offensive to us as cigarette smoke has become?”

MARK KINNUCAN

Huntington Station, N.Y., Sept. 1

The writer is chairman of the Long Island Group of the Sierra Club.

DealBook: Size of Down Payments at Heart of Mortgage Debate

Erik S. Lesser/European Pressphoto AgencyNew homes in Atlanta. Lenders and consumer advocates argue that rules for large down payments could limit lending.

It seemed an easy fix to prevent the excesses of the housing market: make home buyers put more money down.

But as the housing market starts to return and the subprime mess fades from memory, the issue is up for debate.

Lenders and consumer advocates — rarely on the same side of the issue — are now cautioning against down payment requirements. They argue that such restrictions could limit lending, and prevent lower-income borrowers from buying homes. They also contend that the new mortgage rules put in place this year will do enough to limit foreclosures, making down payment requirements somewhat superfluous.

The arguments seem to run contrary to long-standing beliefs about homeownership. For decades, experts have emphasized the need for a sizable down payment — a rule of thumb being 20 percent — on the premise that borrowers with a sizable chunk of equity in a home are less likely to walk away when things get bad.

“If our goal is to prevent foreclosures, I can’t think of anything more effective than requiring a down payment,” said Paul S. Willen, a senior economist and policy adviser at the Federal Reserve Bank of Boston.

The issue may not be so black and white. Regulators want to protect borrowers and promote homeownership. But they also want to encourage lending and insulate the financial system from future shocks.

And the subprime debacle has only distorted the debate, say some analysts. “The problem with this conversation is that it’s like discussing the future of shipbuilding from the deck of the Titanic,” said Roberto G. Quercia, director of the Center for Community Capital at the University of North Carolina at Chapel Hill. “There’s a lack of perspective.”

To underscore his point, Mr. Quercia studied mortgages in a special program for low-income borrowers, typically those with minimal down payments. From 1998 through the end of last year, 5.5 percent of the mortgages ended up in foreclosure, he found. Subprime mortgages made during the last housing boom, regardless of down payment size, had far higher foreclosure rates, roughly 25 percent.

It’s a critical issue for Washington. Currently, taxpayers, through the Federal Housing Administration, backstop most of the low-down-payment mortgages. But the aim is to curb the government’s involvement in mortgages.

As that happens, policy makers are hoping a major part of the mortgage market will come back. Specifically, they need the return of private bond investors, who once bought trillions of dollars’ worth of mortgage-backed bonds with no government backing.

Other than some small bond deals, that market remains dormant. A major reason is that the banks that sell the mortgage-backed bonds are waiting for regulators to complete rules aimed at strengthening this market.

This is where down payments could play a crucial role. The proposed rules require banks to hold a slice of the mortgage-backed bonds they sell to investors. Banks do not like those types of restrictions.

But lenders would not have to keep a piece of the bonds if the underlying loans included features that made them less likely to default. These exempt loans would be called qualified residential mortgages. Regulators effectively proposed that these loans should have a 20 percent down payment.

The proposal prompted widespread objections from consumer advocates, bankers and home builders, who said the plan could shut many borrowers out of the housing market. Banks, they argued, are likely to focus heavily on making qualified residential mortgages. And if those mortgages require high down payments, lenders will be hesitant to make loans with little money down.

Consumer advocates make a nuanced case. They do not deny that down payments reduce the risk of default. But they say defaults can be reduced almost as much by applying other rules that curb lending to certain types of borrowers.

Consider another set of mortgage rules, already put in place this year. These rules emphasize the affordability of the loan. Under them, a borrower’s overall monthly debt payments cannot exceed 43 percent of personal income.

In his study, Professor Quercia of the University of North Carolina found that loans that complied with those rules defaulted at a relatively low rate during the housing bust. About 5.8 percent of them went bad, irrespective of how much the borrower put down.

He then calculated the losses on loans to borrowers in the same group who had down payments of at least 20 percent. The default rate on that smaller group was lower, at 3.9 percent.

But that lower rate came at a cost. More than half of the borrowers in his study group had to be excluded from the second calculation, because they didn’t have down payments of 20 percent or more. This shows how restrictive a down payment rule could be, said Professor Quercia.

Some real estate analysts are skeptical of this approach. They assert that the new mortgage rules, which do not insist on down payments, may be relatively ineffective at preventing high levels of defaults.

The debt-payments-to-income ratio is not a strong predictor of whether a loan will default, said Thomas A. Lawler, a former chief economist of Fannie Mae who founded Lawler Economic and Housing Consulting, a research firm. “It’s not even in the top three,” he said.

Also, Mr. Lawler and others who favor higher down payments argue that Professor Quercia’s analysis underestimates the psychological and practical importance of the down payment. Borrowers who saved up for down payments may have budgeting skills that later help them make their payments, they argue, and borrowers with equity in their homes are less likely to walk away altogether, rather than try to find a solution.

Supporters of a down payment requirement also make a broader argument. They point out that the financial sector overhaul was not just meant to protect borrowers. It was also intended to make banks and financial markets more resilient to shocks like housing busts. In other words, the legislation always envisioned a trade-off between homeownership and the stability of the financial system.

“The key is what is the right balance between some risk and access,” Professor Quercia said. “Just looking at the risks is one-sided.”

DealBook: Size of Down Payments at Heart of Mortgage Debate

Erik S. Lesser/European Pressphoto AgencyNew homes in Atlanta. Lenders and consumer advocates argue that rules for large down payments could limit lending.

It seemed an easy fix to prevent the excesses of the housing market: make home buyers put more money down.

But as the housing market starts to return and the subprime mess fades from memory, the issue is up for debate.

Lenders and consumer advocates — rarely on the same side of the issue — are now cautioning against down payment requirements. They argue that such restrictions could limit lending, and prevent lower-income borrowers from buying homes. They also contend that the new mortgage rules put in place this year will do enough to limit foreclosures, making down payment requirements somewhat superfluous.

The arguments seem to run contrary to long-standing beliefs about homeownership. For decades, experts have emphasized the need for a sizable down payment — a rule of thumb being 20 percent — on the premise that borrowers with a sizable chunk of equity in a home are less likely to walk away when things get bad.

“If our goal is to prevent foreclosures, I can’t think of anything more effective than requiring a down payment,” said Paul S. Willen, a senior economist and policy adviser at the Federal Reserve Bank of Boston.

The issue may not be so black and white. Regulators want to protect borrowers and promote homeownership. But they also want to encourage lending and insulate the financial system from future shocks.

And the subprime debacle has only distorted the debate, say some analysts. “The problem with this conversation is that it’s like discussing the future of shipbuilding from the deck of the Titanic,” said Roberto G. Quercia, director of the Center for Community Capital at the University of North Carolina at Chapel Hill. “There’s a lack of perspective.”

To underscore his point, Mr. Quercia studied mortgages in a special program for low-income borrowers, typically those with minimal down payments. From 1998 through the end of last year, 5.5 percent of the mortgages ended up in foreclosure, he found. Subprime mortgages made during the last housing boom, regardless of down payment size, had far higher foreclosure rates, roughly 25 percent.

It’s a critical issue for Washington. Currently, taxpayers, through the Federal Housing Administration, backstop most of the low-down-payment mortgages. But the aim is to curb the government’s involvement in mortgages.

As that happens, policy makers are hoping a major part of the mortgage market will come back. Specifically, they need the return of private bond investors, who once bought trillions of dollars’ worth of mortgage-backed bonds with no government backing.

Other than some small bond deals, that market remains dormant. A major reason is that the banks that sell the mortgage-backed bonds are waiting for regulators to complete rules aimed at strengthening this market.

This is where down payments could play a crucial role. The proposed rules require banks to hold a slice of the mortgage-backed bonds they sell to investors. Banks do not like those types of restrictions.

But lenders would not have to keep a piece of the bonds if the underlying loans included features that made them less likely to default. These exempt loans would be called qualified residential mortgages. Regulators effectively proposed that these loans should have a 20 percent down payment.

The proposal prompted widespread objections from consumer advocates, bankers and home builders, who said the plan could shut many borrowers out of the housing market. Banks, they argued, are likely to focus heavily on making qualified residential mortgages. And if those mortgages require high down payments, lenders will be hesitant to make loans with little money down.

Consumer advocates make a nuanced case. They do not deny that down payments reduce the risk of default. But they say defaults can be reduced almost as much by applying other rules that curb lending to certain types of borrowers.

Consider another set of mortgage rules, already put in place this year. These rules emphasize the affordability of the loan. Under them, a borrower’s overall monthly debt payments cannot exceed 43 percent of personal income.

In his study, Professor Quercia of the University of North Carolina found that loans that complied with those rules defaulted at a relatively low rate during the housing bust. About 5.8 percent of them went bad, irrespective of how much the borrower put down.

He then calculated the losses on loans to borrowers in the same group who had down payments of at least 20 percent. The default rate on that smaller group was lower, at 3.9 percent.

But that lower rate came at a cost. More than half of the borrowers in his study group had to be excluded from the second calculation, because they didn’t have down payments of 20 percent or more. This shows how restrictive a down payment rule could be, said Professor Quercia.

Some real estate analysts are skeptical of this approach. They assert that the new mortgage rules, which do not insist on down payments, may be relatively ineffective at preventing high levels of defaults.

The debt-payments-to-income ratio is not a strong predictor of whether a loan will default, said Thomas A. Lawler, a former chief economist of Fannie Mae who founded Lawler Economic and Housing Consulting, a research firm. “It’s not even in the top three,” he said.

Also, Mr. Lawler and others who favor higher down payments argue that Professor Quercia’s analysis underestimates the psychological and practical importance of the down payment. Borrowers who saved up for down payments may have budgeting skills that later help them make their payments, they argue, and borrowers with equity in their homes are less likely to walk away altogether, rather than try to find a solution.

Supporters of a down payment requirement also make a broader argument. They point out that the financial sector overhaul was not just meant to protect borrowers. It was also intended to make banks and financial markets more resilient to shocks like housing busts. In other words, the legislation always envisioned a trade-off between homeownership and the stability of the financial system.

“The key is what is the right balance between some risk and access,” Professor Quercia said. “Just looking at the risks is one-sided.”

Fed Officials Debate Bank’s Losses Once Economy Mends

When the economy grows stronger, the Fed plans to sell some of its vast holdings of Treasury and mortgage-backed securities. The Fed also plans to pay banks to leave some money on deposit with it to limit the pace of new lending.

And that could prove an awkward combination. The Fed faces the possibility of large losses as it sells off securities, which could force the central bank to suspend annual payments to the Treasury Department for the first time since the 1930s, even as it would be increasing the amounts paid to the banking industry for its cash holdings at the Fed to control inflation.

“That sounds like a recipe for political problems,” said James Bullard, president of the Federal Reserve Bank of St. Louis. He described the predicament as one reason the Fed might consider limiting its plans for additional asset purchases.

But Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that concerns about potential losses needed to be weighed against the benefits of asset purchases. The Fed holds almost $3 trillion in Treasuries and mortgage bonds, and it is adding about $85 billion a month in an effort to cut unemployment.

Mr. Rosengren, a leading advocate of the purchases, said Boston Fed research showed asset purchases this year could help create about 400,000 new jobs.

“That’s what the Federal Reserve should really be caring about, what’s happening with the dual mandate with and without” the asset purchases, Mr. Rosengren said. “When I think about the costs, I have to weigh that against the benefits,” he said at the US Monetary Policy Forum in New York on Friday.

By law, the Fed sends most of its profits to the Treasury, and in recent years those profits have soared as the Fed has collected interest on its investments. Last year, the central bank contributed $89 billion to the public coffers — essentially refunding a significant portion of the federal government’s annual borrowing costs.

The purpose of the investment portfolio is to hold down borrowing costs for businesses and consumers. As the economy revives, the Fed has said it will begin selling some of those holdings. But it faces potential losses on those sales because interest rates would be rising. Security prices, which move inversely to rates, would be falling, and the government would be issuing new debt at the higher rates, making the low-yield bonds that the Fed holds less valuable.

Estimating the potential losses requires a wide range of assumptions on Fed policy, economic growth and interest rates. A Fed analysis published last month, which assumed that interest rates rose to 3.8 percent later this decade, estimated that the central bank might record losses of $40 billion and suspend contributions to the Treasury for four years beginning in 2017. If rates rose by another percentage point, however, the analysis estimated that losses would triple. An independent analysis published on Friday foresaw losses of around $20 billion and a suspension of payments for only three years.

The Fed can afford to lose money because it can simply print more. It would record a liability, and pay down the debt as profits rebounded.

But there are signs that the Fed’s political opponents would seize on any losses as evidence of economic malpractice. And such that criticism could come at a vulnerable moment: central banks are never popular when they are raising interest rates.

Representative Jim Jordan, an Ohio Republican, cited the potential losses in an open letter this week to the Fed chief, Ben S. Bernanke, requesting more information on what he called “the potentially devastating consequences from any unwind.”

Jerome H. Powell, a Fed governor, insisted Friday that the central bank would not allow its course to be influenced by such political pressure.

“We’re independent for a reason,” he said. “Congress has given us a job to do.”

Some supporters of current Fed policy also argue that an economic revival would inoculate the central bank against criticism, in part because the government’s coffers would be filling even without the Fed’s contributions.

But Frederic S. Mishkin, a Columbia economist and one of the authors of the independent analysis of the Fed’s potential losses, said that was wishful thinking.

“Politicians have very short memories,” said Professor Mishkin, a former Fed governor. “They’re going to focus very much on the fact that the Fed is no longer pulling its weight in terms of producing remittances for the federal government.”

Obama Tells G.O.P. Not to Tie Debt Ceiling to Fiscal Debate

In a speech to the Business Roundtable, Mr. Obama called that irresponsible. “That is a bad strategy for America, it’s a bad strategy for your businesses and it is not a game that I will play,” he said. “Everybody here is concerned about uncertainty. There’s no uncertainty like the prospect that the United States of America, the largest economy, that holds the world’s reserve currency, potentially defaults on its debts.”

While saying he would not “play that game,” a phrase he repeated, Mr. Obama did not say what he would do in response, but some Democrats have urged him in the past to simply raise the borrowing limit using his own executive authority and let the courts determine if he overstepped his constitutional bounds.

He seemed to embrace a suggestion by John Engler, the Business Roundtable president, to raise the debt ceiling enough to last five years. “John is exactly right when he says that the only thing that the debt ceiling is good for as a weapon is just to destroy your credit rating,” Mr. Obama said.

Mr. Obama was reacting to reports that Republican leadership officials were looking for a fallback in the current debate to avert an end-of-the-year fiscal crisis. Some Republicans foresee accepting Mr. Obama’s call to extend Bush-era tax cuts for the middle class while allowing them to expire for the wealthiest Americans, and then taking up the fight again when the nation’s debt rises to the point that the statutory borrowing limit needs to be raised again, which could be in late January or February.

Republicans view any vote to raise the debt ceiling as a chance to enforce more fiscal discipline on Mr. Obama. Speaker John A. Boehner has said any increase in borrowing capacity should be offset by spending cuts that exceed the increased debt. Mr. Obama has responded by proposing to take away the Congressional power to approve increases in the debt ceiling, but Mr. Boehner said last weekend that “Congress is never going to give up this power.”

Appearing before reporters on Wednesday, Mr. Boehner and other House Republican leaders implored Mr. Obama to sit down with them and begin negotiating in earnest to head off the looming fiscal crisis, but with flattery and aggravation, they made it clear that they were now playing on his turf.

Mr. Boehner and his leadership team did not give an inch on their opposition to raising tax rates on the wealthy or their insistence that any deficit-reduction plan emphasize spending cuts. But the speaker sounded exasperated as he insisted that he had moved toward the president’s position by agreeing to $800 billion in higher tax revenue over 10 years.

“The revenues we’re putting on the table will come from guess who? The rich,” he said, his voice rising. “There are ways to limit deductions, close loopholes and have the same people pay more of their money to the federal government without raising tax rates.”

Representative Peter Roskam of Illinois, a member of the Republican leadership, appealed to Mr. Obama’s own view of himself as a politician able to rise above partisanship, a characterization Republicans have rarely, if ever, agreed with.

“I’ve seen an attribute in President Obama when we served together in the Illinois State Senate, where he was able to rise above donkeys and elephants and transform some very controversial issues in a way that was powerful,” Mr. Roskam said, imploring the president to eschew the politics of the victor and seize “an unbelievable opportunity to be a transformational president, that is to bring the country together.”

The dueling public appearances underscored how far apart the two sides were, at least as a matter of principle. Mr. Obama’s plan calls for $1.6 trillion in new taxes over 10 years, mainly through allowing rates to rise on income above $200,000 a year for individuals or $250,000 for families. He has also revived a year-old plan to trim health care and other mandatory spending by $600 billion over 10 years, but he also wants to spend $50 billion in the short term to help the economy.

Pa. Senate candidates meet for only debate

PHILADELPHIA (AP) - Democratic U.S. Sen. Bob Casey is trying to paint his Republican challenger Tom Smith as someone who would worsen partisanship in Congress, while Smith contends he knows better than Casey how to improve the economy.

DealBook: Fed Governor's Plan to Limit Bank Size Fuels Debate

Michael Reynolds/European Pressphoto AgencyDaniel Tarullo of the Federal Reserve has suggested a simple tool that could be applied to individual institutions.

Since the financial crisis, academics, politicians and even former bank chieftains have called for the nation’s banking behemoths to be broken up or shrunk — calls that appear to have fallen largely on deaf ears among Washington’s policy makers.

Now, a powerful insider has suggested a simple tool that could place a tight limit on the size of individual banks. Daniel K. Tarullo, a Federal Reserve governor who oversees bank regulation, said in a speech last week that an important part of a bank’s balance sheet could be capped at a set percentage of the nation’s gross domestic product.

That a regulator at the Fed — the most powerful of the banking industry’s overseers — would say that such a structural overhaul of the financial system might be considered, was a sign that the policy debate over what to do about “too big to fail” might be shifting.

Mr. Tarullo’s “statements mark a significant — perhaps even dramatic — shift in thinking at the central bank,” Simon Johnson wrote in a recent column for Bloomberg News. Mr. Johnson, a professor at the Massachusetts Institute of Technology, has been a leading voice in the movement to limit the size of large banks.

It’s not just that the Fed governor’s words provided comfort to supporters of breaking up the banks. They also come at a moment in the debate over the Dodd-Frank Act, when both Republicans and Democrats might be able find common ground.

Mitt Romney and other Republicans have criticized Dodd-Frank, contending that it is overly complex and protects “too big to fail” institutions. Some Republicans looking to repeal Dodd-Frank say they still want to constrain large banks. Their concern is that the law may lead the market to believe that the government protects large banks. In turn, investors might then provide cheap loans to the biggest banks, fueling even more growth in the banks’ balance sheets. As a result, some Republicans may warm to the simple cap on bank size outlined in Mr. Tarullo’s speech.

“I am completely open to the proposal because of my similar concern about the growing size of institutions that are too big to fail,” said Senator David Vitter, a Republican of Louisiana. “Beyond this specific proposal, there is a growing nonpartisan consensus to do a lot more to limit the size of the megabanks.”

Any shift at the Federal Reserve would be notable. The central bank, mindful of the stability of the financial system, has avoided giving strong backing to measures that could have a direct impact on bank size.

Mr. Tarullo did not give an unequivocal, personal backing to a cap on size of banks. But he said that if size were to become a big issue, Congress should take it up, so the effects of a cap could be debated. Mr. Tarullo then detailed a type of cap that he said seemed to have “the most promise.”

His proposed limit would focus on something called “nondeposit liabilities.” These are the borrowings that banks do to finance themselves, excluding deposits.

For example, at the end of June, JPMorgan Chase had $1.24 trillion of nondeposit liabilities, a figure that excludes deposits in the United States, but includes international deposits.

That $1.24 trillion is equivalent to 8 percent of G.D.P. Any legislation would have to decide whether to set a percentage that would immediately force a bank like JPMorgan to shrink. If it were set at 5 percent, JPMorgan would have to shed the excess borrowings, which in turn would lead it to cut its overall size.

Senator Sherrod Brown, Democrat of Ohio, introduced legislation earlier this year that proposed the cap be set at 2 percent of G.D.P., which would force several of the largest banks, including Citigroup, Bank of America and Goldman Sachs, to shrink aggressively. (That bill has not advanced.)

Alternatively, the cap could be set at a percentage of G.D.P. that allows banks to stay at close to their current size. In that case, it would just constrain future growth.

Dodd-Frank has a provision that sets out to limit the relative size of banks. It stipulates that banks cannot have liabilities that exceed 10 percent of the total financial system’s liabilities. But this may not cap bank growth if the whole system is ballooning, as happened in the last decade. From 1999 to 2007, the Goldman Sachs balance sheet grew by 346 percent. But it would have increased by only 48 percent if its growth had been strictly tied to G.D.P. growth in that period.

The cap has its critics.

One drawback is that it might deter banks from issuing longer-term debt, which can act as a stable source of financing in a crisis. Hal S. Scott, a professor in Harvard Law School, said it would be preferable to limit short-term borrowings by banks, since that is more vulnerable to bank runs.

Others say that the economy needs both large and small banks and growth could be harmed by efforts to dictate bank size.

“The costs to society would outweigh the benefits,” said Phillip L. Swagel, a professor at the School of Public Policy at the University of Maryland. “But I realize that the idea of setting limits on large banks is gaining popularity across the political spectrum.”

Others fear that an inordinate focus on one tool to deal with financial stability could backfire. They think that the multifaceted approach of Dodd-Frank is better at catching and moderating the risks in the banking system.

“I think it’s a mistake to think there’s some sort of silver bullet here,” said Michael S. Barr, professor at the University of Michigan Law School. Mr. Barr worked on Dodd-Frank as an assistant secretary at the Treasury Department. He also says he thinks that going back right now and undoing parts of Dodd-Frank would most likely only dilute the overhaul.

“If Congress took up reform, it would only be in the direction of weakening it, not strengthening it,” he said.

Obama and Romney Hold First Debate

Mitt Romney and President Obama challenged each other on many issues.

DENVER — Mitt Romney on Wednesday accused President Obama of failing to lead the country out of the deepest economic downturn since the Great Depression, using the first presidential debate to invigorate his candidacy by presenting himself as an equal who can solve problems Mr. Obama has been unable to.

President Obama and Mitt Romney squared off on Wednesday night in Denver in the first of three presidential debates.

The president implored Americans to be patient and argued that his policies needed more time to work, warning that changing course would wipe away the economic progress the country is steadily making. The two quarreled aggressively over tax policy, the budget deficit and the role of government, with each man accusing the other of being evasive and misleading voters.

But for all of the anticipation, and with less than five weeks remaining until Election Day, the 90-minute debate unfolded much like a seminar by a business consultant and a college professor. Both men argued that their policies would improve the lives of the middle class, but their discussion often dipped deep into the weeds, and they talked over each other without connecting their ideas to voters.

If Mr. Romney’s goal was to show that he could project equal stature to the president, he succeeded, perhaps offering his campaign the lift that Republicans have been seeking. Mr. Obama often stopped short of challenging his rival’s specific policies and chose not to invoke some of the same arguments that his campaign has been making against Mr. Romney for months.

At one point, Mr. Romney offered an admonishment, saying, “Mr. President, you’re entitled, as the president, to your own airplane and to your own house, but not to your own facts, all right?” He forcefully engaged Mr. Obama throughout the night, while the president often looked down at his lectern and took notes.

A boisterous campaign, which has played out through dueling rallies and an endless stream of television commercials, took a sober turn as the candidates stood at facing lecterns for the first time. Mr. Obama, who has appeared to take command of the race in most battleground states, seemed to adopt an air of caution throughout the evening that left some of his liberal supporters disappointed in his performance.

“Are we going to double down on the top-down economic policies that helped to get us into this mess,” he said, “or do we embrace a new economic patriotism that says, ‘America does best when the middle class does best’ “?

For much of the debate, the candidates commandeered the stage, taking control away from the moderator, Jim Lehrer of PBS, as they kept trying to rebut one other. At times, the moderator seemed as if he had walked off the stage, a result of new rules that were intended to allow for a deeper and more freewheeling discussion.

On a basic level it was a clash of two ideologies, the president’s Democratic vision of government playing a supporting role in spurring economic growth, and Mr. Romney’s Republican vision that government should get out of the way of businesses that know best how to create jobs.

Mr. Romney sought to use his moment before a prime-time audience of tens of millions to escape the corner Mr. Obama and his allies have painted him into, depicting him as an uncompromising adherent to policies that have been tried before. He instead turned the focus on his opponent’s record.

“You’ve been president four years. You’ve been president four years,” Mr. Romney said at one point. He ticked through a list of promises he said Mr. Obama had not lived up to, and said, “Middle-income families are being crushed.”

Neither candidate delivered that knockout blow or devastating line that each side was hoping for. Still, style points went to Mr. Romney, who continually and methodically pressed his critique of Mr. Obama. The president at times acted more as if he were addressing reporters in the Rose Garden than beating back a challenger intent on taking his job.

Throughout the evening, Mr. Romney escaped Mr. Obama’s attempts to pin him down on which deductions he would eliminate in his tax proposals.