The Big Question: Does Wall Street reform do enough?

Dean Baker, co-director of the Center for Economic and Policy Research, said:
The reform fails to take the two obvious steps that would be needed to prevent future crises. The first would have been to break up the “too big to fail” banks. The country has at least 6 very large banks that everyone knows are too big to fail. This means that creditors lend them money with the well-founded expectation that the government would rescue them if the bank ever got into serious trouble.

I calculated the size of the subsidy resulting from this implicit guarantee as being more than $30 billion a year. Other economists have arrived at similar estimates. This is an unwarranted taxpayer subsidy to some of the richest people in the country.

The other step that would have been an important part of an effective reform would be to fire some of the regulators responsible for this disaster, starting with Federal Reserve Board chairman Ben Bernanke. It would be difficult to imagine how a regulator could fail more disastrously in their job than Mr. Bernanke did in failing to rein in the housing bubble before it grew to a size where its collapse would inevitably wreck the economy. Yet, he was appointed to a second term and continues to be treated as great authority on the economy.

Firing Bernanke was important not only as a matter of fairness, it was essential in order to ensure that regulators have the right incentive. It will always be difficult for a regulator to clamp down on dangerous practices of the financial industry. The industry will use all its political power to reverse regulators who want to limit their profits. This will make it tempting for regulators to simply look the other way even when they know that they should be cracking down.

Looking the other way becomes even more attractive if the regulators know that they will face no consequence for failing to act. In this case, the risks are purely one-sided. Cracking down gets a regulator in trouble, even if they are right (ask Brooksley Born), while doing nothing carries no cost, even if the failure to act has disastrous consequences.

At the end of the day, regulations will only be as good as the regulators. We have created a system of incentives that virtually guarantees that we will not get good regulators.

Justin Raimondo, editorial director of Antiwar.com, said:
I can’t say it any better than one of the commenters on the news story published in The Hill put it:

“Yet another 2000-page bill, which no lawmaker has read, named after the two biggest crooks in congress, Dodd and Frank.”

There’s just one way to “reform” Wall Street, and that is, as Ron Paul puts it, “End the Fed.” Dodd and Frank are the bankster’s biggest friends, and naturally they joined together to block true reform by gutting Paul’s bill providing for Fed transparency. Expecting “reform” from them is like expecting to meet Al Capone and Caligula in heaven.

Peter Navarro, professor of economics and public policy at UC Irvine, said:
Oh please. Far enough? It’s out in left field. Require homeowners to put 20% down like in Canada and we never would have had a housing bubble. Now we “fix” this with more red tape and bureaucracy? You can fix stupid.

John Castellani, president of the Business Roundtable, said:

It remains to be seen; however, last night’s conference report is an example of Congress rushing to pass legislation without the proper consideration of the consequences of its actions. One of the primary causes of the financial crisis was the focus on short-sighted special interests over sustainable, long-term growth for the entire economy. The bill doesn’t address that fully as it contains provisions that may make short-termism worse.

Take the provisions granting the Commodities Futures Trading Commission authority to impose margin requirements on end-users – this will reduce businesses’ ability to manage risk and will substantially raise costs for the more than 12,000 public companies that had nothing to do with the financial crisis, potentially costing 100,000 – 120,000 American jobs.

Another troubling element of the bill is proxy access, which will exacerbate the short-termism that led to this crisis by allowing special interest groups to turn elections for boards of directors into expensive and disruptive political contests. This provision will allow a small, discrete minority of shareholders to disrupt companies’ operations at the expense of these companies’ – and our economy’s – long-term economic prosperity. It’s difficult to see how anyone could argue that proxy access will do much to prevent future crises.

Business Roundtable members have long championed the need for meaningful financial regulatory reform, but this legislation simply takes our country down the wrong path. Financial reform is a complex issue that demands careful attention and constructive debate; this bill raises more questions than workable solutions and ignores the diversity of U.S. businesses, harming their ability to innovate, create jobs and grow the economy over the long-term.