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What does success mean on FinReg?

We're seeing a lot more stories about how this or that political figure is increasingly optimistic about a financial regulation package making it out of the Senate this year. The latest in the genre sees Paul Volcker saying happy things, and Robert Gibbs saying that the end of May seems like a plausible timetable (color me very, very skeptical on that).

Let's presume they're right and a couple of Republicans will sign onto something called "financial-regulation reform" and pass it out of the Senate. What product are we talking about, exactly? Success on this issue remains pretty ill-defined. With health care, you could say it covered this many people at this much cost. With cap-and-trade, you could say it imposed this limit on carbon emissions by that date.

With FinReg, the closest anyone has come is whether it has an independent consumer protection agency, which though a good thing, is not really the core of the project. I'd say the center of this has to be defined capital requirements, but those aren't in the Dodd bill. And since everyone agrees that there are regulatory packages we can pass that won't solve the problem, it seems we have to get real clear on what success is before we start talking about whether it's likely.

By Ezra Klein  |  March 31, 2010; 1:35 PM ET
Categories:  Financial Regulation  
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Next: Drill, baby, drill


Bringing back Glass-Steagall would be my definition of success.

If you leave the Bank Trust as it is today, they'll just game the Ref's and change the rules/regulations to their liking -- just like they did the last time.

Posted by: leoklein | March 31, 2010 1:56 PM | Report abuse

Barry Ritholz has a nice list of 10 questions any FinReg reform package must answer.

He doesn't give specific recommended responses, though many of them are implied in his questions. But it's an excellent starting point. By identifying specific objectives reform should work toward, we can develop standards against which reform packages can be assessed and monitor how much the horse-trading and sausage-making dilutes meaningful reform.

What Ritholz' list illustrates is how complex and down-in-the-weeds reform needs to be, because there were so many factors that contributed to or exacerbated the collapse of the system. He starts with ratings, works his way through derivatives, capital adequacy, etc.

IMO, the obsession with "too-big-to-fail" is obscuring more than it is serving as a guide for reform. Nothing is going to remove the need for government to intervene when (inevitably) a bout of excessive financial exhuberance turns into a panic and crash. And since a substantial portion of the causes and contagion of the crash this time wasn't in the banking system but was in the capital markets, focusing on just TBTF depository institutions doesn't address the problem.

Also, a focus on stopping financial crises is clearly not enough. As Treasury and the Fed have insisted, the reform needs to have a cleaner, faster and more equitable resolution process beyond the deposit insurance system. But that's not going to eliminate the need for bail-outs. Next time it will be the same only different, but in unpredictable ways, so we need the government to have better tools to respond when the inevitable happens.

We might significantly reduce the potential for the capital markets to be the source of full-blown systemic collapse by breaking up the size of the big institutions that play in so many markets (and can't really understand the risks implicit in their overly-complex business). But there's no way politically that those institutions are going to be broken up, any more than it was likely that we'd nationalize them a year ago. Simon Johnson et al are just repackaging their hobbyhorse and, I'm afraid, diverting energy away from the less emotionally-charged but more do-able reform initiatives.

So again IMO, better to focus on cleaning up a number of areas in which there is broad consensus about significant failures than choosing one factor -- like ye ol' public option -- on which to judge "success" or "failure". And we'd avoid the trap that distorted the HCR debates, of so focusing on one feature that a whole lot of other equally important areas were ignored.

If, however, you want to choose one feature that defines "progressive" success and swing for the fences, it would be a robust and effectively-independent Consumer Protection Agency that meets most of Warren's criteria.

Posted by: nadezhda04 | March 31, 2010 3:54 PM | Report abuse

I want the financial transactions tax, designed to catch computer arbitrage and day traders.

I want regulation of and taxes on derivatives trading, especially on third party speculators (as opposed to farmers or other commodity producers).

CFPA as an independent regulator.

Bring back glass stegall.

Lets have a 70% tax on bonuses over 1 million. and a top tax rate of 50% on income over 2 million.

Its a start.

Posted by: srw3 | March 31, 2010 4:54 PM | Report abuse

Dude, STOP SAYING FINREG. You're the only one using it and it sounds extremely silly.

Posted by: bridgietherease | March 31, 2010 8:12 PM | Report abuse

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