FinReg vs. Wall Street reform
But he's right about the legislation. The desire for a bill that does more has obscured a clear picture of a bill that does a lot. "We’ve tended to focus much more on what’s not in the bill than on what is in the bill," Yglesias says. "What is in the bill is a consumer protection setup that would be considered a major progressive win as a standalone item. What is in the bill is a 'resolution authority' that will let future regulators avoid the bailout-or-crisis dynamic that plagued us in 2008. What is in the bill are regulatory tools that even Simon Johnson likes. The bill clarifies lines of regulatory authority and responsibility and should cut down on abusive 'competitive regulation.' "
I'd add a few more major wins. Bringing derivatives onto exchanges and into clearinghouses is a huge victory. In 2007, the over-the-counter -- and almost entirely unregulated -- derivatives market was worth about $700 trillion in notional value, and regulators had no idea what went where and few firms had serious capital or margin requirements. Those days are over.
The bill will also force much more transparency from financial firms and provide regulators with reams and reams of information on the financial markets. It creates the Office of Financial Research to serve precisely that purpose. The presence of information won't stop regulators who decide to explain away what the data is telling them, but if it helps regulators see and stop even one bubble, that's a major victory, albeit not one that we'll ever know about.
The Consumer Financial Protection Bureau got mentioned, but it's a huge deal, with the potential to become as important to consumers as the Food and Drug without the massive flow of subprime mortgages being sold to people who didn't understand and couldn't afford them. The CFPB would've been in a position to intervene, and though we'll never know whether it would've succeeded if it had been around in the early-Aughts -- extending housing credit to working families was a bipartisan priority, and Congress might've defanged an aggressive regulator -- now there's at least a cop on the beat.
For these reasons and more, as far as financial regulation goes, this is a very good bill. But if you were looking for Wall Street Reform -- say, a bill that would limit how big financial firms could get, or how much leverage they could hold, or how profitable they would be, or how much we would need to rely on fallible regulators -- this bill doesn't deliver.
Wall Street, in anything close to its current form, is not a regulatable entity over the long term. It's got too much money, and its business model is too reliant on calculated complexity, for regulators to truly keep up. That's why so many people wanted to fundamentally change Wall Street. But we haven't. Individual firms will still be big enough, and interconnected enough, to pose a risk to the entire system. We're not setting hard capital requirements into law. This bill leaves that task -- all of those tasks, really -- to regulators. Wall Street only reforms if they tell it to. And the finance sector, of course, will still be rich enough to plead its case to future congresses, and future regulators, with enormous amounts of cash.
But that just goes back to the point: Wall Street will be a very recognizable entity a year from today. The regulatory structure won't be.
This is, by and large, a financial regulation bill. There are exceptions, and its authors have thought long and hard about trying to prevent regulatory failure, but in the absence of total structural reform, it was always going to be a financial-regulation bill. It had no other choice. The result, according to the Chamber of Commerce, calls for 533 rules, 60 studies and 94 reports. Regulators will be in charge of all of them. Which is only to say that we're not done, not by a long shot. The thing about regulation is that implementation is everything, and then vigilance is everything.
Photo credit: By Mark Wilson/Getty Images
Posted by: DDAWD | July 15, 2010 6:37 PM | Report abuse
Posted by: rmgregory | July 15, 2010 6:45 PM | Report abuse
Posted by: sherifffruitfly | July 15, 2010 7:02 PM | Report abuse
Posted by: sherifffruitfly | July 15, 2010 7:06 PM | Report abuse
Posted by: jimeh | July 15, 2010 7:30 PM | Report abuse
Posted by: amileoj | July 15, 2010 7:54 PM | Report abuse
Posted by: SnowleopardNZ | July 15, 2010 9:03 PM | Report abuse
Posted by: SnowleopardNZ | July 15, 2010 9:07 PM | Report abuse
Posted by: jkaren | July 15, 2010 9:10 PM | Report abuse
Posted by: ronjaboy | July 16, 2010 6:27 AM | Report abuse
Posted by: justin84 | July 16, 2010 9:51 AM | Report abuse
Posted by: JBfromFL | July 18, 2010 2:20 AM | Report abuse
The comments to this entry are closed.