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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.

By Ezra Klein  |  September 1, 2010; 3:21 PM ET
Categories:  Financial Regulation  
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Next: Lieberman cont'd

Comments

"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." Indeed.

And how is the situation any different for energy regulation, or food safety regulation, or environmental regulation, or ...?

And it really ends up not mattering a whole lot which party is "in power". It's all VERY depressing.

jifster

Posted by: jifster | September 1, 2010 6:13 PM | Report abuse

--"But what was the choice?"--

Freedom, and personal responsibility, you moron. Those are always the only moral choices there are.

Posted by: msoja | September 1, 2010 10:56 PM | Report abuse

STOCK MARKET WILL CRASH ANY DAY

YOU WON'T BELIEVE WHY HOME VALUES WILL FALL BY 30%-40%

The answer is simple and complex. Unemployment Calibration defines my theory of corporate America’s outsourcing of all the jobs and its affect on housing.

Sadly, foreign nations chuckle that the U.S. will someday only have work for Americans willing to do cheap labor work or cook french fries at fast food restaurants.

Failure to enforce immigration laws is the intentional policy of the U.S. Government to ensure access to cheap labor.

American Corporations cut both skilled and unskilled jobs and marketing/advertising expenses, and calibrated their model to sell more product and services to their current clients and foreign nations. (And they call it "right sizing.") Result - irreversible high U.S. unemployment that will be 10% or much more forever.

These Corporations seek only to show “better than expected” earnings. Final sales demand in the United States will disappear.

The FED cannot fill this joblessness void. But the politicians will go through the motions. The FED and stimulus, near zero interest, intentional devaluation of the U.S. $ Dollar, all have failed to create good paying jobs.

Without robust job creation, and rising wages, the Housing Market is trapped in this dichotomy, creating an endless spiral of foreclosures and home price reductions. (as well as GDP decline)

Why? Low paying jobs produce Americans without much money to spend. Home values will need to fit into their budgets, and thus fall, fall, fall.

These Corporate and Government policies reflect shortsightedness and will ultimately, in the not too distant future, not only drive home prices down but lead to the inevitable decline of the United States.

Warmest,

Richard Michael Abraham, Founder

The REDI Foundation www.redii.org info@redii.org

Nationwide Non Profit Research and Educational Foundation

Registered with Attorney General, Massachusetts

Posted by: info96 | September 2, 2010 12:19 AM | Report abuse

Having read Ezra's little puff piece on Wall Street and 'regulation', it once more disappoints me that the $$$ pundits are either ignoring or not altogether aware of a financial tsunami about to descend on the economy.

Learning apparently nothing from the AIG debacle, the talking heads and writing hands choose to remain silent on Credit Default Swaps that are wholly and totally unregulated. There are at least $60 plus trillion dollars worth of them out there that could bring down the world's finances.

AIG collapsed on less on less than a half trillion CDSs.

Here's who to blame as you're crawling into that cardboard box...Phil Gramm (look it up), the massively ill-informed teapublicans, the blue dog dems and last and certainly least, a president who sells out his country for want of offending those greedy minions who are already selling out his country...a few of whom he looks at across the table! Cream with your coffee, Tim?

Posted by: tossup | September 3, 2010 4:27 PM | Report abuse

Does anyone else see a pattern here? After 9/11, the greatest lapse in security ever in America, no one was fired; they just created a massive bureaucracy and ultimately invaded Iraq, which had nothing to do with the attacks. Now, after the greatest economic crash in our lifetime, they're creating another big bureaucracy which will regulate a lot of businesses like payday lenders and gift card issuers who had nothing to do with the economic collapse. And in both instances, the diversionary course was legitimized by the press, which failed to ask critical questions.

Posted by: Creeze2 | September 7, 2010 7:03 PM | Report abuse

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