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Why I'm Pessimistic About Financial Regulation

I think it's a bit early to label the administration's financial regulatory reform proposals a "damp squib." This wouldn't be the first time that the run-up to a major policy announcement announcement out of the Obama White House depressed expectations but observers found themselves pleasantly surprised when the details were unveiled.

But forget the details. I'm increasingly pessimistic on the success of the whole endeavor. Bloomberg is reporting that financial regulation isn't expected to hit Congress till sometime next year. That's a solid eight to 12 months in which the broader public can lose interest in financial regulation and the financial industry can ramp up its lobbying effort in the Congress. It also puts us a lot closer to an election, which will make that lobbying effort all the more effective. And, assuming our recovery continues apace, it's also past the period in which the government had massive leverage on the financial sector. A few months back, the banks needed federal intervention to survive. Right now, the government is helping them rebuild. In a year, the financial sector might have decided it doesn't really need the government at all.

Put it this way: Six months ago, it was easy to imagine securing an overwhelming change to the financial regulatory structure. Seemed almost a given, in fact. Today, I'd consider it unlikely. Banks have beaten back cramdown legislation and secured the ability to pay back TARP funds and managed to argue the stress test regulators into reducing the capital they needed to raise. They don't seem to be losing many battles. And 12 months from now? It's almost impossible to imagine Congress mustering the energy for a massive fight over financial regulation. Momentum matters for these things.

Also: Derek Thompson has similar concerns.

By Ezra Klein  |  June 16, 2009; 12:00 PM ET
Categories:  Financial Regulation , Solutions  
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What we lose in momentum we will gain in perspective. Some of the worst regulations are passed immediately following an economic crisis, when the root causes of the crisis are still poorly understood. A securities law passed in 1950 probably would not have been as burdensome as the '33, '34, and '40 Acts. Sarbanes-Oxley mainly just ended up enriching accountants and their "Sarbanes-Oxley compliance teams". Perhaps a reform passed in 2005 would have been less burdensome for the business community.

Posted by: Dellis2 | June 16, 2009 2:35 PM | Report abuse

I'm not sure what Dellis2's point is. A securities law passed in 1950 probably would have meant that today's meltdown would have occurred sooner, whereas the "burdensome" regulations passed in the 30s did a pretty good job keeping finance stable into the 80s.

Anyhow, it's hard to believe that this outcome is really any different from what Obama and his team have wanted all along. Give them credit: the reason stronger regulatory reform seemed like a given a few months ago was that their easy-does-it approach seemed doomed to failure. They pulled it off, which was no mean feat. Doesn't make for a better economy, but is one for the record books.

Would this have been different if by pure happenstance Obama had moved someplace other than Chicago, and so taught at a different law school that U Chicago, and so hung out with a different economics-theory crowd?

Posted by: JonathanTE | June 16, 2009 3:36 PM | Report abuse

There is a huge difference in cultural dynamics between the legalistic, rules- oriented mindset of Washington regulators and the money-oriented, Darwinian mindset of Wall Street traders, investment bankers and sales representatives.

Government and Congressional policy-makers need to truly "get" what commission and bonus-oriented people are doing all day at work in asset management -selling duplicative, mediocre and ill-conceived financial products without genuine accountability or fear of future consequences.

For example, I count about 11,000 different listed marketable securities that retail clients can invest in through a commissioned or on-line broker - did you know that current regulations don't require the Investment Firms to report to the public the percentage of all customer accounts that have outperformed riskless investments such as Treasuries and Bank CD's over the last 5 or 10 years (it's a very small percentage)?

In addition, investment firms are not mandated to audit client results and disclose EXACTLY how much public customers have actually MADE or LOST on the specific investment purchases made over the years.

The public's money will always be at risk until the government realizes that most retail investments are profoundly speculative and contain more organic risk than understood by amateur investors.

Recommendations are often made haphazardly by financial firms -based on the compensation involved or what's in vogue at the moment - which overstate the potential success and understate the high probabilities of losing principal... perhaps forever.
Douglas Klein, Executive Director

Posted by: InvestmentLiteracycom | June 16, 2009 4:04 PM | Report abuse

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