Archive for May 22nd, 2010

Financial reform bill: Better than nothing

22 May 2010

This week the Senate passed a financial reform bill that’s at least a bit tougher than looked possible a couple weeks ago.  Paul Krugman has a concise rundown on it right here:

“What’s good? Resolution authority, which was sorely lacking last year; consumer protection; derivatives traded through clearinghouses; ratings reform, thanks to Al Franken; tighter capital standards for big players, although with too much discretion to regulators.

“What’s missing? Hard leverage limits; size caps; not much in the way of restoring Glass-Steagall. If you think that too big to fail is the core problem, it’s disappointing; if you think that shadow banking is the core, as I do, not too bad.”

Dean Baker has some additional words here on Al Franken’s credit-rating-agencies reform amendment, which would eliminate the huge grades-for-sale conflict of interest of having companies being rated pay the rating agency for their work.  Instead, the Securities and Exchange Commission will assign the rating agency for each new securities issue.

The Senate bill also includes a Consumer Financial Protection Agency, which will be technically independent, as reformers had been pushing for and industry had been furiously opposing.  However, the agency will be housed within the Federal Reserve, which reformers had opposed because of the Fed’s dismal track record on consumer protection over the past decade.  Supposedly the agency will not have to answer to the Fed’s leadership, but we’ll have to see how that works out in practice.  I have not yet seen any word on whether the fabulous Elizabeth Warren, the Harvard Law professor who had been advocating for this agency, would still be interested in heading it.

All told, the bill still leaves much to be desired — Simon Johnson and James Kwak at The Baseline Scenario decry its lack of hard capital requirements or bank size restrictions — but looks a whole lot better than nothing: