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FinReg vs. Wall Street reform

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Matt Yglesias calls it "the underrated FinReg bill," and I take that headline as a personal victory of sorts.

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

By Ezra Klein  |  July 15, 2010; 5:42 PM ET
Categories:  Financial Regulation  
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Comments

In other words, the bill isn't Palin-proof.

Posted by: DDAWD | July 15, 2010 6:37 PM | Report abuse

Frankie say "Relax".

Obama say "There's nothing to fear in this bill."

Question: Has anyone watched the original [UK] video for "Relax"? Or the version in Bill Maher's "Body Double"?

Posted by: rmgregory | July 15, 2010 6:45 PM | Report abuse

"In other words, the bill isn't Palin-proof."

No, it means it isn't ELECTORATE-proof. Just like any other law, say.... Glass-Steagal.

When the electorate fails, it allows all else to fail.

Posted by: sherifffruitfly | July 15, 2010 7:02 PM | Report abuse

Also, Ezra, it would be nice if you could clarify in what precise ways the law-to-be helps and fails to help the Too Big To Fail issue. The teevee pundits are running around unanimously saying it doesn't help in the least.

Posted by: sherifffruitfly | July 15, 2010 7:06 PM | Report abuse

If an administration gets into power that's determined to ignore regulation, law, and anything else that gets in its way, as we saw in the past administration, then trying to make a law Palin-proof is a fool's errand. There's always going to be a tension between making a regulatory law more flexible (and arguably more effective when administered by competent regulators) by leaving more of the details at the administrative level vs. making it harder to evade by specifying more in the law itself. But neither one is much help against a thoroughly lawless administration.

Posted by: jimeh | July 15, 2010 7:30 PM | Report abuse

"But if you were looking for Wall Street Reform... this bill doesn't deliver."

Politically speaking, the problem with this is that Wall Street Reform is exactly how the bill is being touted. (e.g., ABC News currently has the headline as "Obama Hails Passage of Wall Street Overhaul".)

And with good reason! Wall Street Reform -- in the sense of punishing and bringing to heel the big-time players who wrecked the economy and then got bailed out for their trouble -- is enormously popular with the public. Will we be able to say the same about this legislation, once voters figure out that, all spin aside, Wall Street in the wake of the bill is still Wall Street as we knew it before the bill was passed?

The spin would be a lot easier to believe if Wall Street were screaming a lot louder right about now. Its relatively mild reaction is ultimately going to tell voters much more than any speech, or even any in-depth analysis, ever could.

This is a large missed opportunity to have singled out and visibly humbled the giants of the financial sector. That would have been good for the economy in the long run. It would have been even better for the Democrats' political prospects in the short run.

Posted by: amileoj | July 15, 2010 7:54 PM | Report abuse

Obama succeeds in another campaign promise. You may not like him, but he's getting a lot done:

Expanding healthcare coverage: check

Clean energy investment: check

Financial reform: check

Student loan reform: check

Education overhaul: check

Iraq drawdown: check

Next up, Energy/CO2 Legislation & Immigration!

Posted by: SnowleopardNZ | July 15, 2010 9:03 PM | Report abuse

...if the resolution authority part of this bill prevents another round of TARP, preventing failing institutions from getting a bailout but remaining intact, then this bill's a win.

Posted by: SnowleopardNZ | July 15, 2010 9:07 PM | Report abuse

hurray for president barack obama!!
* * * * * *
i raise my glass of spring water, in a toast!!

Posted by: jkaren | July 15, 2010 9:10 PM | Report abuse

Yay! Two more Federal agencies! Why couldn't some of those functions be put under one of the ones we've already got? Or are any of the functions of these agecies going to be transferred to the new ones?

Posted by: ronjaboy | July 16, 2010 6:27 AM | Report abuse

What exactly does this bill really do?

Barry Ritholtz doesn't even believe it would have stopped the last crisis.

http://www.ritholtz.com/blog/2010/06/stop-the-next-crisis-this-wouldnt-have-stopped-the-last-one/

I guess you can give it one thumb up for (probably) not making anything worse.

Posted by: justin84 | July 16, 2010 9:51 AM | Report abuse

Obama succeeds in another campaign promise. You may not like him, but he's getting a lot done:

Expanding healthcare coverage: check

Clean energy investment: check

Financial reform: check

Student loan reform: check

Education overhaul: check

Iraq drawdown: check

Next up, Energy/CO2 Legislation & Immigration!


Posted by: SnowleopardNZ
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
I like him, that is not what this is about. It is about failure.

"Expanding healthcare coverage: check " did you want this bill? the majority did not, and it was placed before jobs or foreclosures.

"Clean energy investment: check " Investment when we are broke? brilliant! Raising our taxes thru cap-n-trade when we cant afford our light bills already?not so brilliant.

"Financial reform: check" this isnt law yet, but it has less to do with Wallstreet and government than the goverement owning Fannie and Freddie and being accountable. Fannie and Freddie are never mentioned by liberals,why?

"Student loan reform: check" what a great step for our country, to not let any bank provide funding for college. Only the government can do it now! And, it was SNUCK into the healthcare bill! Very successful!

"Iraq drawdown: check"
Afghanistan drawup, check

"Next up, Energy/CO2 Legislation & Immigration!"
energy =cap-n-trade...raise your electric bills.

Immigration? What has this admin done other than to file a lawsuit? Sorry, but the the state needs protect our laws and citizens when the federal government wont.

I sometimes wonder if the pro-left actually read the bills/news or do they just give blind love to their leader?

Posted by: JBfromFL | July 18, 2010 2:20 AM | Report abuse

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