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Which of these four goals is FinReg supposed to accomplish?

This is a pretty important question, I think, and not one that there's any real consensus on. I can think of at least four things that you'd want to do with financial-regulation reform, some of which overlap, and all of which are represented by various proposals right now.

1) Improve regulators' ability to detect and respond to a too-big-to-fail crisis. In the run-up to the 2008 meltdown, regulators had much too little information about derivatives and shadow banks and counterparties and credit instruments and most of the other contributors to the crisis. This made it harder for them to see the vulnerabilities in the financial sector. And them, when the meltdown did happen, they didn't have the tools to cleanly and quickly kill off the wounded banks. This is basically the theory behind the Dodd bill, and it's why it focuses so intently on the amount of information flowing through the system and resolution authority over failing firms.

2) End the possibility of TBTF crises altogether. Regulators fail. They may not have had all the information they needed, but they had enough information to recognize that something was terribly wrong. They just chose not to heed it. The only way to stop too-big-to-fail crises, some think, is to stop banks from becoming so big we can't let them fail. And the way to do that is to break them up when they reach a certain size, measured in a certain way (opinions on what that size is, and how it should be measured, differ). This is what Simon Johnson and Sen. Ted Kaufman want to do.

3) Reform --and shrink -- Wall Street. Maybe even breaking up big banks isn't enough. Moving money around and trying to "rip the face off" stupid investors just isn't a terribly productive pursuit. But when it becomes a very profitable pursuit -- more than 40 percent of total profits in the richest nation on earth, in fact -- the sector will inevitably suck talent and money away from the rest of the economy and enjoy enormous rewards for taking huge risks that pay off.

4) Protect consumers. As one expert put it to me, the financial crisis happened one mortgage application at a time. If people who didn't know much about mortgages and teaser rates and credit trickery hadn't been sold contracts that exploited their ignorance, we wouldn't have had the rip of subprime defaults that brought the economy down. So any response to the crisis, some say, has to deal with the consumer dimension of it: People have to be able to understand the contracts they're signing and the contract-writers need to be watched by regulators so they don't trick people with teaser loans and floating interest rates that haven't been adequately explained. This is Elizabeth Warren's cause, and it's what the Consumer Financial protection Bureau is all about.

I'm sure I'm missing some, of course, and you should feel free to add on in comments. But the worth of a financial-regulation bill is impossible to judge outside the context of what we want it to do. Everyone seems to agree on No. 1. There's less agreement on No. 2. Dispute over the details on No. 4. And very little agreement on No. 3 (though I think there's a lot to recommend the argument). But wherever folks fall, it would be useful if the relevant legislators and bureaucrats and experts were being a bit clearer about their vision of what financial regulation should accomplish.

By Ezra Klein  |  April 16, 2010; 1:22 PM ET
Categories:  Financial Regulation  
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Next: McConnell doesn't have the votes to filibuster FinReg. Yet.

Comments

It seems to me that some sort of change to the regulation of the ratings agencies needs to be included in any bill. It's obvious that they helped inflate the bubble by slapping 'AAA' ratings on financial products that weren't worthy. Whether this was out of ingnorance, or out of greed, it was a problem.

Posted by: masmith78 | April 16, 2010 1:56 PM | Report abuse

It seems to me that some sort of change to the regulation of the ratings agencies needs to be included in any bill. It's obvious that they helped inflate the bubble by slapping 'AAA' ratings on financial products that weren't worthy. Whether this was out of ingnorance, or out of greed, it was a problem.

Posted by: masmith78 | April 16, 2010 1:56 PM | Report abuse

It seems to me that some sort of change to the regulation of the ratings agencies needs to be included in any bill. It's obvious that they helped inflate the bubble by slapping 'AAA' ratings on financial products that weren't worthy. Whether this was out of ingnorance, or out of greed, it was a problem.

Posted by: masmith78 | April 16, 2010 1:56 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 1:56 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 1:56 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 1:56 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 1:58 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 2:01 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 2:07 PM | Report abuse

Three should really be a no-brainer. Much of the left-leaning commentary during the crisis talked about Phil Gramm and the hugeness of banks but all that talk weirdly vanished once Democrats had to act.

It seems like there's mutually exclusive choices, but like you said, that's not necessarily the case. Personally, I think everything else can spring from a framework revolving around number three -- much as the HCR revolved around a framework of mandate/subsidize/regulate.

The problem is that there's little political will to do break up banks. Without (3), regulators will fail or be too lenient and "consumers" will face losses -- maybe not from "credit trickery" -- but from a tanking economy.

Posted by: Chris_ | April 16, 2010 2:12 PM | Report abuse

dear god, the comments submit button is severely messed up. can you please delete some of those entries?

Posted by: Chris_ | April 16, 2010 2:29 PM | Report abuse

Will Fannie and Freddie be covered by these reforms?

Posted by: tomtildrum | April 16, 2010 3:16 PM | Report abuse

Obama explained the reform as not allowing future bailouts! That seems real stupid, as the bailouts were elective on the government part anyways!

Reform should include FULL DISCLOSURE, TRANSPARENCY, and strict limitations on the development of tricky complex investment and the ability to buy derivatives as an insurance policy to your risky falsely rated investments!

Most of Wall Street is in the back pocket of the DemocRat Party, Mega Wall Street Crook Bernie Maddoff is Poster Boy for that claim. I am all for bringing hammer down on the crooks of Wall Street and associates that cheat the system! We need reform that will provide hard time for these the A-Holes that I witnessed cheating in college, and now they have apparently carried that lack of integrity to their professional life at our expense!

Posted by: theaz | April 18, 2010 10:32 AM | Report abuse

theaz: "elective" to the extent that they chose to prevent a depression.
(sure it could've been handled much better, but the need for the bailouts is not controversial among economists).


Regarding point #4: "If people who didn't know much about mortgages and teaser rates and credit trickery hadn't been sold contracts that exploited their ignorance, "
It would be nice if the (State) government(s) actually would try to educate people about finances, including the basics of credit card & mortgage trickery.

Posted by: nomadwolf | April 19, 2010 12:55 AM | Report abuse

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