As Senate takes up financial reform bill, a look inside the sausage
The Dodd-Frank financial reform bill leaves too much discretion to regulators, creating the risk of regulation uncertainty for an industry that needs less risk, not more.
If one’s grasp of history can deter a repeat of it, then a nutshell review of the 2007-09 financial crisis is now needed as Congress nears passage of a massive Wall Street reform bill.
The crisis grew out of a ramp up of federal support for mortgages to home buyers who were either unworthy to take on big debt or unaware of their loan’s details. These shaky purchases helped create a housing bubble, while the iffy mortgages were snatched up blindly by Wall Street investors. The risks were magnified by shoddy practices in credit-rating firms, the derivatives industry, and banks. When the bubble burst, Washington didn’t have enough tools to prevent the fallout.
Now, more than a year later, a 2,319-page bill known as the Dodd-Frank Wall Street Reform and Consumer Protection Act aims to prevent a repeat of this worst economic disaster since the Depression. And just in case the remedies don’t work, the bill makes it easier for government to clean up future financial messes.
If passed, as expected, it faces a long highway of implementation with potential offramps for its most difficult provisions.
Congress, for instance, leaves dozens of the toughest decisions up to regulators, such as levels of compensation for bank officials, the types of proprietary investments that banks can pursue, the determination of when a firm is too big to fail, or the amount of money that big firms must keep in reserve.
Granting such wide discretion to regulators may give them flexibility in responding to a crisis, but it also leaves them open to influence by lobbyists, as is often the case, or allows future presidents to weaken regulations.
The bill has no provision to guide regulators if American firms decide to take their business to other countries with fewer regulations. Without a global agreement on how to manage such companies across borders, the US stands to lose jobs and income.