by Patrick Appel
I'm still trying to make sense of the bill, but I've pasted together some thoughts from around the web in the meantime. James Surowiecki:
The bill has been subject to considerable criticism because it doesn’t break up the country’s biggest banks, with people saying that this leaves our Too Big to Fail policy in place. But while the bill doesn’t do much, if anything, about the “Too Big” part, what it does do, at least in theory, is make it possible for even too-big institutions to fail, by creating a mechanism that will allow the government to, in effect, place failing institutions under conservatorship, and wind them down over time, thereby avoiding both the chaos of the Lehman Brothers bankruptcy on the one hand, and the need to give troubled banks government-subsidized handouts on the other.
The bill leaves multiple regulators with wide discretion across a range of critical issues. The argument over precisely what the new rules will be is barely getting started. Some of the most important questions -- such as the amount of capital financial firms will have to set aside -- are scarcely even addressed. Again and again, the bill calls for studies to be undertaken. No matter how these open issues are resolved, unintended consequences will come thick and fast. The whole thing is unfinished work with a vengeance. Nonetheless, better this than nothing.
Had the measures in Dodds-Frank been in place in 2007 would it have prevented the financial crisis? Since the crisis seems to have been caused by borrowers taking on excessive debt, lenders taking on excessive risk, and the failure of any of a handful of financial institutions posing unacceptable risk to the entire financial system, the answer would appear to be no. Dodds-Frank does little if anything about any of these matters.
We’ve tended to focus much more on what’s not in the bill than on what is in the bill. 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.
So financial reform has passed through Congress. It could have been worse as my colleagues recently discussed. But President Obama must be careful about claiming too much. "The American people will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts" he said yesterday. The words might come back to haunt him in a few years' time if a Lehman (or AIG) saga repeats itself.
An analysis by a group called Maplight.org uncovered an interesting fact about the vote. The 38 Senators who opposed the bill in the cloture vote this afternoon received an average of $103,266 in campaign contributions from commercial banks. The 60 Senators who were yea votes took an average of $76,759. Obviously this is just part of the puzzle, but it's worth noting.
The bill will make us safer although it will not eliminate future financial crises. Periodic crises are an inherent feature of market capitalism, or indeed any economic system run by humans. What it will do is to make these crises less frequent and considerably less damaging to the economy. This safety comes at a cost, though; economic growth is most years is likely to be a bit slower because banking will be modestly more expensiveloans will be a little costlier and a little harder to get. This is a trade-off worth making, because the real benefit will be from avoiding the severe economic damage that comes in crisis years.
Rep. Barney Frank the single person who may have had the most to do with the bill’s final form has blamed many of the greatest financial problems on “non-regulation” rather than “deregulation.” He’s right about that. A working financial system cannot exist in the absence of law and the bill represents a good faith effort to update an outdated financial regulatory framework. As written, the bill contains good ideas and bad ideas in roughly equal number. It could surely stand improvement; but, if implemented wisely, will correct some of the problems that led to the financial crisis in the first place. The risks of overcorrection, however, remain real and, whatever happens, the numerous new agencies and rules created under the legislation will need careful, ongoing scrutiny.
The American people will continue to have to foot the bill for the mistakes of Wall Street’s biggest banks because the legislation does nothing to diminish the economic and political power of these giants. It does not cap their size. It does not resurrect the Glass-Steagall Act that once separated commercial (normal) banking from investment (casino) banking. It does not even link the pay of their traders and top executives to long-term performance. In other words, it does nothing to change their basic structure. And for this reason, it gives them an implicit federal insurance policy against failure unavailable to smaller banks thereby adding to their economic and political power in the future.
Despite the bill's length, most of the regulations have yet to be written. Inevitably, those rules be written to the specifications of the largest banks, because the large-bank mindset will be the only one present in the room. My first prediction is that the biggest long-term consequence of this legislation will be a significant increase in concentration in the U.S. financial industry. My second prediction is that the financial consumer protection agency will turn out to be the financial incumbent protection agency. It will be captured by legacy financial firms, who will use it to outlaw new competing products as unsafe.
No doubt quite a few inquiring minds will be wondering how a financial reform bill that failed at 100% of its objectives while accomplishing virtually nothing can possibly be considered a "stunning success".
This is where it pays to consider the crucial point: reasonable expectations.