Wall Street rises again
Some Twitter conversations I had yesterday and this post from Matt Yglesias suggest it's a good time to revisit my critique of the financial regulation bill and its heavy reliance on regulators.
Now, there's lots of good stuff in the financial regulation bill. Some of it, like the Consumer Financial Protection Bureau, even relies on regulators. But though Wall Street will be more cautious for a while and regulators will be temporarily more stringent (both of which are arguably bad things as we're trying to recover), the basic shape of the industry looks much like it did before the crisis: Our response to the initial meltdown made the biggest banks even bigger and our eventual legislative response gave the very regulators who failed us this time more power and information in the hopes that they won't fail us next time.
What you could say, of course, is that the regulators won't fail us next time. But it's not clear why you'd say that. As I see it, here's what happens next: We move to a very long rulemaking phase, as the financial regulation bill leaves an extraordinary amount undefined. That phase will probably go okay, as regulators still feel pretty burnt after the financial crisis. And then we enter a long retrenchment phase, in which giant banks just keep pushing and pushing and pushing, both against regulators and against Congress, and there are no similarly powerful interest groups pushing against them, and the public and the media are totally uninterested in the nuts and bolts of financial policy rulemaking.
It's that dynamic -- an incredibly moneyed and politically sophisticated industry massed on one side, and pretty much no one on the other side -- that worries me about financial regulation. And that's why I'm skeptical of the approach the administration and the Congress eventually took. If it's overly vague and reliant on regulators now, what's it going to be like in 20 years?
But what was the choice? We largely confined the discussion to how to detect and intervene in future crises, rather than how to reshape the financial sector into something that's less out of control. Congress really didn't know what it was doing, much less have a clear idea what it should've been doing. It's not like heath care where lots of people had a lot of preexisting knowledge of the full universe of options. So they passed a lot of stuff off to the regulators to figure out.
And I guess we'll see how that works out over the long run. While the bill was being constructed, a lot of perfectly moderate folks told me that it was hard to imagine a successful piece of legislation that didn't do anything to reduce the financial sector's absurd profits. Well, we're still at 10 percent unemployment and the economy is still weak, but the financial sector has rediscovered its pre-crisis profit levels. At the end of the day, the financial crisis will have done a lot more to change the shape of our labor market than our financial sector, and that seems like a rather odd outcome.
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