We won't get another chance at FinReg
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
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