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We won't get another chance at FinReg

regretfuldodd.JPG

Steven Pearlstein isn't a big fan of Chris Dodd's FinReg package either.

"There are so many political accommodations involving carve-outs and size limits and overlapping responsibilities that it creates exactly the kind of complexity, the opportunities for regulatory arbitrage and the lack of accountability that got us into this mess in the first place," he says.

One important difference between financial regulation and health-care reform: The latter is continuous and the former is not. We pass important health-care legislation every few years. The Medicare Prescription Drug Benefit in 2003. The Children's Health Insurance Program in 1997. We revisit this subject almost constantly. There's continuous political pressure, a large group of committed legislators, and an active community of advocates.

Not so for financial regulation. We rarely make big changes in the regulatory structure. When we do, it's usually to dismantle protections. That's because the pressure comes mainly from Wall Street and there are few knowledgeable legislators or powerful advocates who push in the other direction. So where health-care reform has to be a good start, financial regulation needs to be good, full stop.

With that in mind, consider the way the bill deals with “Too Big to Fail.” After seeing the danger these firms posed to the system and the way regulators abandoned their duties in the run-up to the crisis, you could imagine dealing with this in a couple of ways. One would be to break these companies up under the theory that too-big-to-fail is too-big-to-exist. Another would be to set strong capital requirements on these companies under the theory that if you're large enough that risks imperil the economy, you shouldn't be able to take many risks.

The bill does neither thing. Instead, it empowers a council of regulators to watch firms that are too big to fail and allows them to make recommendations to the Federal Reserve on how to deal with the companies. If the council is really tripping out, they can partner with the Fed to break these firms up, but all of this presumes regulators who realize we're in a bubble rather than regulators who -- as happened in the aughts -- are part of the intellectual consensus that we're not in a bubble.

At base, this bill does a lot for regulators when a financial crisis is obvious, but it doesn't do nearly enough to prevent future financial crises. And since this is the best shot we're going to get for a while, that's good enough.

For more, see my summary of the bill.

Photo credit: By Jason Reed/Reuters

By Ezra Klein  |  March 17, 2010; 12:54 PM ET
Categories:  Financial Regulation  
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Comments

There is no such thing as a firm that is "Too big to Fail".

Creative destruction is part of the free market system. If the model is unviable, the entity goes bankrupt, assets are bought by others who have more efficient models.

By this administration's desire to pick winners and losers, the markets are distorted. The irony is that after the meddling is done and unintended consequences happen, this same administration will decry the 'free market' for those consequences.

Posted by: WrongfulDeath | March 17, 2010 12:59 PM | Report abuse

Man, I remember back in the days after the Lieberman cave, where Ezra was arguing the Dems needed an issue they can afford to fail on: Financial Reform. Go for the maximum, and make the GOP vote against it, went the argument. Think of the political capital the Dems would gain! They'll clean up!

Instead, it looks like another lost opportunity by a bunch of spineless poo-weasels. How suprising...

Posted by: antontuffnell | March 17, 2010 1:08 PM | Report abuse

I agree with antontuffnell - I'm surprised by the reversal. Why accept a Consumer Financial Protection Agency that's "housed under the Fed?" This is something Democrats can do with massive popular support. There's no reason this has to be "the best shot we're going to get for a while," so it's not good enough.

If Republicans want to vote against a real Consumer Financial Protection Agency, let them.

Posted by: madjoy | March 17, 2010 1:13 PM | Report abuse

Was this a typo?

"And since this is the best shot we're going to get for a while, that's good enough."

From the thrust of the post and Ezra's previous views on this matter, it seemes to me, he meant to say,

"that's NOT good enough."

It seems precisely because this is the last shot we're going to have for a while... and because as he says the bill doesn't do enough to prevent future financial crises, it's not good enough.

Posted by: suzannadana | March 17, 2010 1:30 PM | Report abuse

Color me confused as well. I thought from Ezra's earlier posts that he was against half-assed "what we can get" compromises on FinReg because standing on good policy was, in this instance, good politics. Hell, I agreed with that! And most of this post sounds like he's opposed to the legislation, and it's paired with a sad sack picture of Dodd. Then at the end he's tagged on a "Yeah, but this is what we can get, so we should pass it." I don't get it.

WrongfulDeath, uh, do you remember that the last Administration didn't want firms collapsing left and right either? That letting Lehman fail was soon afterwards considered a massive mistake? And like Lehman, the complete crash of the economic system would have gone far passed "creative destruction" and right into "Wold-wide Depression" with the attendant "massive misery" for millions or billions of people.

Moreover, this undistorted market you seem to prize does not now nor has it ever existed in the Real World. The reason, of course, is that people have concerns beyond growth in overall GDP.

Posted by: MosBen | March 17, 2010 2:05 PM | Report abuse

"We rarely make big changes in the regulatory structure. When we do, it's usually to dismantle protections."

SarbOx and TARP come to mind.

Posted by: tomtildrum | March 17, 2010 2:07 PM | Report abuse

According to Ezra:

On health care, we must accept the compromised Senate bill because such an opportunity will only come around once every several decades, although it does seem that we legislate the issue "constantly."

On financial regulation, we don't do reform very often, so it's important to accept whatever watered-down compromise we can get.

The only consistency here lies not in the arguments but in Ezra's consistent attempts to foist on the rest of us what the establishment deems to be reform. Nice work, grasshopper!

Posted by: redscott | March 17, 2010 2:14 PM | Report abuse

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