Obama: Financial Reform Law 'Provides Certainty.' Does It?

Before President Obama signed the landmark financial regulation law, he confronted the well-worn meme that his policies create too much uncertainty, saying the new law "provides certainty to everybody, from bankers to farmers to business owners to consumers."

Does financial reform really provide certainty? Well sure, the features of the bill are more certain now that they're law. But even supporters of the bill would acknowledge that the law leaves quite a bit of uncertainty about how the financial system will be regulated.

First, the law provides no hard rules for capital requirements or leverage limits -- crucial measurements of risk taking -- since many financial experts agreed that it would be best to coordinate US law with global banking rules, which will be debated at the upcoming Basel III Accords.

Second, the law doesn't touch Fannie and Freddie, the mortgage giants whose eventual reform will be crucial to the multi-trillion dollar housing and housing investment market. Third, it doesn't really remove the government's implicit backing of big banks' liabilities. Fourth, there are still concerns that small community banks could face disproportionate penalties. Finally, any law whose rules are contingent on 79 years of cumulative study can't be called a deliverer of certainty.

In general, the reform generally relies on regulators more than rules to govern the financial sector. It eschews a "Volcker Rule"; increases the discretion of existing regulators like the Federal Reserve; creates new agencies with new powers like the Consumer Financial Protection Bureau. There's nothing devious, or necessarily wrong, about leaving regulation to the regulators. But you can be certain the law will morph in the hands of shifting personnel and changing administrations.

Just look at the fight over Elizabeth Warren, a long-time advocate for the middle class, to head the agency. Both sides are clamoring of her nomination precisely because her personality could dramatically mold the organization for years to come. A middle class crusader will build a very different CFPB than your average, or even above average, Treasury bureaucrat.

Rather than build a straitjacket with ironclad rules, this financial reform law has created a regulatory infrastructure where people matter. This was the easier route for lawmakers. It might even be the right route, the more flexible route, for the financial system to grow within the law's framework. But this wasn't the route of certainty.