8 Ways of Saying 1 Thing on Financial Reform: We Need Hard Rules

Regulators missed warning signs the first time. What's to stop them the next time?

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Last week the Wire brought you a roundup of ideas on how to prevent the next financial crisis. The Dodd bill, a set of reform measures under consideration in the Senate, proposed by Democratic Senator Chris Dodd of Connecticut, does't incorporate all of those ideas. As always, of course, bloggers can find plenty to pick at: some don't like the restrictions on startup investing, while others want a bill that specifically addresses the "too big to fail" problem. But there's one thing in particular that's bothering a lot of people: the lack of clear rules for what banks can and cannot do, and what regulators must do. In other words, there would be more oversight under the Dodd bill, but there would be a lot of wiggle room and discretion given to the regulators.

  • Works for a Determined Administration Only  "The Dodd bill," argues economist Paul Krugman at The New York Times, "would give an administration determined to rein in runaway finance the tools it needs to do the job. But it wouldn’t do much to stiffen the spine of a less determined administration." In other words, it "would create a system highly dependent on the wisdom and good intentions of government officials." It proposes to let "federal regulators enforce 'strict rules "'strict rules for capital, leverage, liquidity, risk management and other requirements'" but doesn't say what those rules will be.
  • 'A Trojan Horse for the Status Quo'  John Judis for The New Republic observes that there are several "obvious lessons that most points out that most economists and policy-makers outside the University of Chicago have drawn from this financial crisis." But the measures they agree upon, drawing on these lessons, "are not written into law [under Dodd's plan], but are to be carried out at the discretion of ... the Financial Stability Oversight Council." What's wrong with this? "Whenever an agency doesn’t do its job in Washington, the temptation is to create still another agency to oversee it." But who's to say, argues Judis, this new council will do any better than the Fed did?
  • Just Awful  Barry Ritholtz calls the Dodd plan a "limp ineffective series of toothless proposals." His ideas for real reform (including hard rules) are here.
  • 'A Nice, Sugary Taste,' writes Mike Konczal of the Dodd bill. The SEC, he explains, gave exemptions to Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, and Morgan Stanley, allowing them to to increase leverage to about 20-40 to 1. 
There is nothing in the Dodd Bill that would have stopped this other than the hope that regulators at the Federal Reserve are smarter, more resistant to lobbying, and will let their actions be more transparently monitored, critiqued and subject to democratic review by the public and the general community of investors than the SEC. Maybe this is true today, and maybe this is even true on a medium term time frame. By why take the chance, when we can simply put in a hard line of 15-to-1 like in the Frank Bill?
  • Asking Too Much  "Any bill," declares Reuters's James Pethokoukis simply, "that requires prescience by regulators and then the will to act on unpopular forecasts is doomed to fail."
  • Psychics  "Sen. Chris Dodd, D-Conn.," writes Forbes's Nicole Gelinas, "wants to legislate clairvoyance, requiring financial regulators to see the future perfectly and prevent it before it happens."
  • Let Me Put It This Way  The Washington Post's Ezra Klein made his name making health care reform comprehensible. This is his stab at explaining the problem people have with the Dodd bill: "if you just told someone the basic facts of the case--'we had a huge financial crisis abetted by lax and captured regulators and we're going to try to prevent the next one by giving those regulators way more power'--they'd think it pretty weird."
  • 'An Is-Ought Problem,' offers Joseph Cotterill as a "meta-ethical take," in a casual wave to philosopher David Hume. "Senator Chris Dodd's gigantic financial reform bill is starting to attract a bit of nerd rage for giving regulators power to regulate--but not the requirement to use it."
This article is from the archive of our partner The Wire.