The health care reform battle was wildly popular among Americans, because every person felt like the issue directly affected their lives. The financial reform battle? Not so popular. Its subject matter is more obscure, and it's not clearly relevant to the lives of regular people who work outside the financial industry. Yet as we learned through the 2008 crisis, banking and credit can affect everybody. Just as bad health care can create human suffering, so can a toxic financial market.
Each of the foundational sections that will definitely be in the final bill is listed below (see this post for some explanation of the proposals). In each section, you will see how they will affect every American -- not just those who work at a bank or hedge fund. But like any regulations, there are potential positive and negative consequences.
Systemic Risk Regulator
The Good: The hope is that this will enhance economic stability by spotting and fixing economic shocks before they hit. That means unemployment rates shouldn't be a severe during recessions.
The Bad: Of course, we can't be sure that the crystal ball of this new regulator will be any better than that of previous regulators. It could be a costly waste. The average Americans will face higher prices for products offered by the firms on which it imposes additional regulatory burden. Taxpayers will also be on the hook for its administrative expensive.
Non-Bank Resolution Authority
The Good: Again, economic stability is the goal here by quickly and painlessly winding down big firms.
The Bad: The way Congress structured it, the taxpayers will have to loan the FDIC the money to cover costs for winding down big institutions that fail. So if that includes paying creditors that the failed firm owes $10 billion to, for example, then that money will come in part from your tax return. Those firms are required to pay back the FDIC in full, but if they also go bankrupt before they can, then taxpayers could still end up with a loss.
Consumer Financial Protection Agency/Bureau
The Good: This one is easiest to relate to the average American. If it works as intentioned, it will protect consumers from dangerous financial products. Think: option adjustable-rate mortgages. Such toxic loans could be forbidden. It also seeks to ban abusive credit practices. Additionally, the agency will impose new requirements on borrowers -- like proving your income before being provided a loan.
The Bad: This will limit the options available to consumers, as it will probably eliminate some products from the marketplace that it deems dangerous. You can also expect credit to cost more. As we saw with the credit card regulation last year, when banks are ordered to change their practices, consumers get stuck with a higher bill.
Regulation of the Derivatives Market
The Good: These new rules could produce a more stable economy, if advocates for this regulation are right.
The Bad: It's easy, however, to see how these new requirements could make consumers worse off. It will likely be quite expensive for small banks and real estate shops with a weak capital base to utilize derivatives if they must be cleared (longer explanation here). That means more expensive loans for consumers.
New Rules for Securitization
The Good: Again, the hope is better economic stability if better underwriting produces safer asset-backed securities.
The Bad: By forcing banks to retain some of their securitizations, however, they will be forced to originate fewer loans. That will lead to less credit availability, which will raise the price of credit for consumers. Those people without spotless credit will also have more trouble getting loans going forward.
If all works as Congress anticipates, the result will be a more stable economy and additional protection for consumers in their financial transactions. But as you can see, those potential benefits also come with a great many costs.
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