Different tree, same monkeys

The new financial reform bill follows the pattern of the health reform bill.  Instead of changing the system is a straightforward way, Congress chose to create a new level of regulatory complexity which may or may not do good.

The main obstacle to progress is the Senate’s rule that 41 Senators can block a vote on any measure, and the Republican leadership’s willingness to use that rule to block the will of the majority.  A secondary obstacle is the Obama administration’s unwillingness to press for meaningful change.

The Senate rejected an amendment offered by Senators Ted Kaufman of Delaware and Sherrod Brown of Ohio to break up the six “too big to fail” banks so that they could no longer hold the economy hostage. But the bill does contain a provision allowing federal regulators to break up the banks if they pose a “grave risk” to the financial system.

The bill supposedly contains a version of the Volcker Rule, which limits the ability of banks to use taxpayer-guaranteed deposits to speculate in risky investments.  But according to Senator Kaufman the bill’s many exemptions and exceptions make this rule meaningless.

Instead of limiting the size of banks and the power of banks to gamble with taxpayer-insured money, the bill creates new regulatory agencies with new powers.  It trusts the regulators to be independent of the bankers and smarter than the bankers, and at the same time to refrain from using their power capriciously or arbitrarily.  Past history gives little reason for that trust.

The rule of law is almost always preferable to arbitrary regulatory power.  With a simple clear law such as the Kaufman-Brown amendment or a no-loophole Volcker Rule, both banks and the public would know where they stood and be able to plan accordingly.

Click on The Wall Street Reform Bill: How Much Did We Lose Getting to 60? for Senator Ted Kaufman’s analysis of the new legislation.

Click on Tim Geithner’s Ninth Political Life for a report on the Treasury Secretary’s opposition to meaningful financial regulation.

Click on Psychoanalyzing the Relationship Between Obama and Wall Street for a background article from New York magazine.  It describes the efforts to Treasury Secretary Timothy Geithner to block the Kaufman-Brown amendment and other “populist” measures.  A “senior Treasury official” is quoted as saying Kaufman-Brown would have passed if the administration supported it.

The New York article is interesting for what the author, John Hellemann, takes for granted – that Wall Street bankers have a right to a say in U.S. legislation, and that no President can afford to alienate the them on a permanent basis.  Alas for President Obama, the Wall Street establishment demands deference as well as practical help, so he probably has forfeited their support.

Click on Goldman Sachs Did Not Just Survive, It Was Rescued for a preview of how financial regulation is likely to work.  Economist Dean Baker points out that the $500 million fine Goldman Sachs has agreed to pay for its crooked financial dealings may well be less than the actual profit on those dealings.

Click on The New Finance Bill: A Mountain of Legislative Paper, a Molehill of Reform for commentary by former Labor Secretary Robert Reich.

There are things in the new law that are good, or could be good, but that is not the question.  The question is whether the new law is sufficient to prevent the next financial crisis from being worse than the last.

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