How to Tackle Financial Regulatory Reform

Handling banks, bankers, and Republicans

Democrats are hinting that financial regulatory reform could be the next big legislative push following the passage of health care reform. We've covered the advice for how to prevent the next financial collapse. Now that reform is finally ready to move from the theoretical realm of economists to the excruciatingly practical world of legislators, what's changed? Here's the insight for how to handle the banks, how to handle the bankers, and how to deal with wary Republicans.

• 'Too Big to Fail' Is a Red Herring  The New York Times' Paul Krugman warns, "Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s." Instead of fretting about bank size, legislation should "update and extend old-fashioned bank regulation."

• Don't Settle for Current Bills  Mother Jones' Kevin Drum is hopeless. "There's pretty much universal agreement that reining in leverage [available to banks] is the single most important thing we can do to moderate future financial crises," he writes, but laments that neither the current House or Senate bill adequately address this problem. "Color me pessimistic that this is likely to turn out well."

• Don't Rely on Republicans  Talking Points Memo's Brien Beutler can't believe he has to remind Democrats of this. "You'd think that after watching the four month health care fight turn into a year-long game of legislative Calvinball, Democrats wouldn't take anything for granted. But when it comes to financial regulatory reform, they're downright assured: they're going to get a bill, and it's not going to require any concessions to the GOP. "

• Set a Firm Leverage Ratio  Kansas City Fed Chief Thomas Hoenig insists that legislation detail a very specific ceiling of the allowable leverage-to-assets ratio. He suggests 15. "I think that would do a lot to become counter-cyclical. In other words, when the boom time comes, people and banks tend to say: 'Let's lend more against our capital base, and things are good, we always get paid back.' And it becomes pro-cyclical. [But] when you have a clear rule that says if you want to lend more once you're at this maximum, you have to raise proportionally more capital, then it comes counter-cyclical and much healthier for the economy."