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The Problem With Leaving Financial Regulation Till September


As if the administration didn't have enough on its plate, Monday will see President Obama giving a speech on the need for financial regulatory reform, which has bogged down a bit in Congress.

This is one of the few places where I think the administration made a serious error in timing. Financial regulation reform was the natural partner for the bailouts. It was the only policy package that offered the hope of a sort of political closure for an angry public. The bailouts might have been necessary, but they were galling. A new regulatory approach, however, would at least have let the Obama administration argue that Wall Street had been badly punished, and a new norm had been quickly established. As it was, the bailouts just hung there, alongside AIG's compensation packages and news of Goldman Sachs recovering to post record profits and the American people facing down a record deficit. The angry public never received any satisfaction. Obama famously told the banks that he was all that was standing between them and the pitchforks, and he was right. But that's not a popular place to stand unless you have some alternative method of satisfying the mob.

The end result was that the Wall Street rescue was very loud and very swift, while regulation is happening very quietly, and rather late. The arguments for this are what they are: Time was needed to do it right, bandwidth was needed for issues such as health care, and the market's recovery was fragile. But politically, it robbed the American people of closure, and left a simmering anger that Wall Street had fleeced the country. Which it had. More substantively, it also gave the banks time to regain their footing, Republicans time to build some momentum, and the political system time to turn the bulk of its attention to other things. So it's not clear to me that the schedule will actually end up with a better result.

Photo credit: By Susan Walsh — Associated Press

By Ezra Klein  |  September 11, 2009; 3:36 PM ET
Categories:  Financial Regulation , Solutions  
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Next: Short-Termism


Whatever they do they should factor in the general incompetence of the Federal bureaucracy and the tendency of politicians to pressure regulators to look the other way when sound regulation conflicts with their political interests e.g. affordable housing.

Posted by: fallsmeadjc | September 11, 2009 3:43 PM | Report abuse

And it might be a good idea to not classify MBS's or their next generation as being less risky than cash in their capital requirement regulations. Especially if politicians are going to continue to undermine MBS's with their affordable housing interests.

Perhaps they could forbid SEC employees from being part of the Federal Employees Union. That would give the markets greater confidence in them. The Detroit management model hasn't worked very well.

Posted by: fallsmeadjc | September 11, 2009 3:51 PM | Report abuse

"But politically, it robbed the American people of closure"

It also opens up the health reform's mandate to charges that it is just another giveaway to Big Business. Just another reason why the public option is important...

Posted by: Chris_ | September 11, 2009 3:53 PM | Report abuse

I'd summarize the ground rules like this:

1. In any battle between a decent but not overwhelming majority of the people on one side of an issue, and the corporate interests on the other, the majority is almost always fighting the uphill battle.

2. Passion on the part of that majority can make the difference.

3. You only have people paying attention to most issues for a little while, and then they move on. If people care about an issue NOW, and you're a politician who wants to pass something that will benefit them at the expense of the corporate interests, then you've got to move on it NOW.

Obama's team clearly forgot #3.

Posted by: rt42 | September 11, 2009 4:29 PM | Report abuse

Good post. It would have made more sense to seize on the moment and do financial regulatory reform first, and then the even more complicated and challenging politics of health care reform, after gaining some momentum. Now, the political capital is mostly used up and the anger over the financial crisis has ebbed or been distracted from.

Posted by: danimmer | September 11, 2009 5:28 PM | Report abuse

There could be better bills but, as you pointed rightly, politics is clearly lost. Messers Obama, Summers, Tim and Bernanke clearly missed here and will be there in G20 meetings in Pittsburgh listening to sermons of Europeans and leaders of other nations. Surprisingly, it may be Europeans, and Chinese to certain extent, who will pressurize Americans to come on the right path.

As I keep on saying (never forget what Sen. Durbin said that Bankers own Congress), there are only 2 things permanent in this republic:
- American Constitution (with totally distorted Senate) and
- Power of Wall Street.

Otherwise at the height of Great Recession, Goldman Sachs of this world would not get free; Fed would not have been blatantly fool to honor each and every contract of AIG to pay 100% to counter parties who happened to be all these Wall Street bankers (and many Europeans too). Bernanke is on record saying Fed was required to honor those AIG contracts.

But what it meant is Americans, poor Americans with possibly no or loosing insurance, took more debt to repay these bankers and their huge bonuses now!

Geithner and Bernanke want to go home and sleep calmly under the impression that this wrong was necessary to save American Economy and this was for all the benefit of common American. Hard to accept.

Posted by: umesh409 | September 11, 2009 5:58 PM | Report abuse

Yeah that Obama guy is such a naive innocent political fool that he has caused the public to be left with "a simmering anger that Wall Street had fleeced the country." which will help Republicans politically a lot.

In theory the Republicans could try to outflank the Democrats to the populist ends of the spectrum (I won't explain the plural. Goodwin wouldn't approve of discussion of right wing populism). In practice, look what happened to Huckabee. The bankers own the Republican party so Republicans can't use anger at bankers -- they can't even dodge it. Now you and I know that bankers also own most of the Democratic party, but I'm not going to tell the public if you don't.

Posted by: rjw88 | September 11, 2009 7:19 PM | Report abuse

After a year trolling the finance blogs I concluded that nothing will ever change. If you want to live in a country where the people are not chattel of Wall Street bigshots, you have to move someplace else.

Posted by: bmull | September 11, 2009 10:15 PM | Report abuse

Swift regulation would have taken a lot of the air out of the Teabaggers' sails, which I suspect would have improved the prospects for healtcare.

Posted by: TWAndrews | September 11, 2009 11:02 PM | Report abuse

Swift regulation would have taken a lot of the air out of the Teabaggers' sails, which I suspect would have improved the prospects for healtcare.

Posted by: TWAndrews | September 11, 2009 11:02 PM | Report abuse

i'm sorry but you have no idea what the tea-baggers are about. They're against the stimulus. They're against the growth of government eating up the private sector. (ie government jobs have increased substantially since Jan 2009 while the private sector keeps shedding jobs down to its breaking point).

unless you meant that they regulated YEARS AGO then i doubt regulation even earlier this year would have had an effect. oh and it would have no effect oh healthcare. Again they're against what they feel is government overstepping its boundries into the private sector. They're against the auto takeover but when it comes to their healthcare and the fact that it affects them personally. They take that much more seriously.

Posted by: visionbrkr | September 11, 2009 11:33 PM | Report abuse

My be that was Geithner/Summers intention all along....

Posted by: hariknaidu | September 12, 2009 5:21 AM | Report abuse

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