Wednesday, March 3, 2010

What's Left of Financial Reform?

by John Case

Key senators are reported close to a deal on legislation to overhaul financial regulations.

The most immediate question is whether consumer protection requires an institution independent of the banking industry. Consumer protection is nominally under the jurisdiction of the FED now. The Fed's past handling of its consumer protection powers has brought heavy criticism. Thus a deal between Senator Dodd (D., Conn.) and Senator Corker (R., Tenn.) adding new consumer protection powers and mandate but keeping supervision under the Fed may be short-lived. The administration would have to back down from a strong advocacy of independence from the banking industry being fundamental to this reform effort.

Its not at all clear how conflicts of interest between banks and their customers can be resolved through a single institution dominated by banks. It does not matter how many regs you have. You have an institution with two in-part exclusive missions. One to preserve bank health (profitability), the other to impose strong transparency and risk limits and have liability obligations -- with their own money at stake -- to financial services customers.

Fed Chairman Ben Bernanke's arguments that having divided authority in a financial crisis is dangerous cannot be denied. He can point to the swift action that prevented a meltdown of the US and global financial system. But the problem is: the collapse may have been averted, but the cure never came. Reforms that Bernanke himself has favored will be doomed by the very concentration of power that has emerged even more powerful than before the crisis. This power is manifesting itself in every battle and showing its lobbying strength. And the phony Republican populism "against the banks" -- the banking lobby is buying it lock, stock and barrel, along with some Democrats too, in service to defeating every real serious reform effort -- whether it is of the Volker (make the smaller) or Krugman (make them much more regulated -- like Canada).

Krugman says its not worth passing a lousy financial reform, since it won't be tested (or revisited) until the next financial crisis which the phony "bankers" reform will do nothing to prevent.

Krugman is probably right about the economic effectiveness of the Dodd-Corker compromise. On the other hand breaking Republican logjams may be more important in de-railing the overall right-wing offensive to win back big chunks of Congress in the Fall by paralyzing all legislation.

Paralysis is becoming almost a bigger issue than everything. Time to get movin'.