Regulation

Financial Reform Will Definitely Work After Regulators Figure Out How to Make It Work

|

Worried about the next economic meltdown? Don't get your hopes up. Congress' new scheme to prevent the next economic crisis isn't more of a plan to say that they're against economic crises—and figure out how to stop it later:

"I would say that nothing in this bill would have prevented the previous crisis — the one we are working our way through right now," said William Isaac, former chairman of the Federal Deposit Insurance Corp. "And it clearly won't prevent the next crisis."

The law sets broad guidelines for the existing patchwork of regulators—including  the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission — and establishes bodies to oversee consumer protection and monitor "systemic risk."

Those regulators have been tasked with writing the specific rules of the road governing limits on risk-taking by financial firms and previously unregulated trading.  Other provisions are supposed to make it easier to liquidate large institutions that pose a risk to broader financial system. A new consumer protection bureau is supposed to guard against lending abuses.

But it will take years before the impact of the law is known. That's because most of the specific regulations have yet to be written.

"The devil is in the details: There are a lot of unanswered question that were thrown to regulators," said Jay Brown, a professor of corporate and securities law at the University of Denver. "The reason it was thrown to regulators is because there are no answers. So for example: What's too big to fail? Nobody knows the answer to that."

But the regulators will figure it out, right? After all, they were so effective in the last crisis. Er. I mean…

Under the new law, banks and other financial institutions will be overseen by a council of  regulators. That group will be charged with identifying the kinds of "systemic" risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008.

But there's little to be gained by entrusting that task to the same regulators who failed to spot the causes of the panic the first time, said Isaac, the former FDIC head.

"If a bank went to the regulators and said, 'We've got a good idea: we're going to put our lending officers in charge of risk management,' that bank would be put out of its misery immediately," said Isaac. "That's what the government just did. It put the regulators in charge of assessing their own performance. It's a very bad system."

How about the big banks? At least we're not going to continue to favor them taxpayer-funded advantages, right?

The new law also sets up different rules for big banks—those with more than $10 billion in assets—and the rest of the industry. That means a handful of banks will continue to enjoy "too big to fail" status—complete with an implicit government guarantee that lowers their borrowing costs and gives then a competitive edge, according to Hurley.

"It enshrines for the foreseeable future that there are two parts of the financial system," he said. "There are the six largest banks, which account for about 60 percent of the financial system, and then there is everybody else, from regional banks down to credit unions. The top six get a subsidy in the form of lower borrowing costs. And everybody else pays for it."

For three more reasons why the new financial reform law won't work, check out Reason.tv.

NEXT: The Age of Limbaugh

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. “It enshrines for the foreseeable future that there are two parts of the financial system,” he said. “There are the six largest banks, which account for about 60 percent of the financial system, and then there is everybody else, from regional banks down to credit unions. The top six get a subsidy in the form of lower borrowing costs. And everybody else pays for it.”

    That was pretty much the point wasn’t it? Whatever Obama does, it is always about benefiting a few important institutions or people at everyone else’s expense.

  2. I was reading a little bit of it. 13(3) Federal Reserve loans will be limited to “systemically important institutions”. That determination requires a 2/3 vote of the Fed’s Board, plus approval from Treasury. Isn’t Jamie Dimon still on the NY Fed’s Board?

    They don’t need a “council of regulators”. What they need is Bill Black. Of course, they may try to kill him, again, but what the Hell, criminals always try to off people that get in their way. They tried to kill Andrew Maguire for exposing JP Morgan’s manipulation of the silver market, didn’t they?

    http://www.nypost.com/p/news/b…..5KdevIsQ7N

  3. “And it clearly won’t prevent the next crisis.”

    That’s not what the president said!

    1. This legislation will ensure that [insert crisis here] never happens again.

      [laughter]

      No, really. There are folks who say–

      [laughter]

      Stop that!

  4. “””The devil is in the details: There are a lot of unanswered question that were thrown to regulators,” “”

    The new trend seems to be passing an empty shell of a law and dealing with the devil in a manner that the details don’t lose votes. It’s a game changer for the citizen. How can you know how a bill effect you if the details haven’t been written?

    Shame on Obama, Shame on Congress. Will the republicans follow their lead when they are in power?

    1. This is not like Road to Serfdom in any way at all. I can’t believe all the kooks keep bringing up that book. It’s about England in 1946, and has no bearing at all on the USA in the present.

  5. I forget, the market loves uncertainty, right? Especially with regard to new nebulous government regulations?

    1. It is unclear at this time

    2. Of course. Investors, especially big ones from foreign countries, really love to sink money into an economy which could be radically altered by unknown legislation at any time. It’s their favorite thing to do.

  6. 2300 pages of doublespeak, which nobody (with the possible exception of lobbyists) has read. And the details have been left to the regulators to “hash out” later.

    And the re-election rate will once again be 95+ per cent.

    1. “And the re-election rate will once again be 95+ per cent.”

      I don’t think so. I think the rules about that are starting to change. I will bet you that over a 100 seats in Congress change hands this fall. It bet it is more like 80%, which is still too high. But it will be earth shattering to the political class who expect 95% as a matter of right.

      1. At least 70% of the electorate will just see this as “getting tough with the banks” and “preventing another financial collapse”. You don’t seriously think most people are doing research as to the actual effects of the bill, do you?

        As TrickyVic notes above, they’ve figured out what went wrong with the original Obamacare bill. If they can just pass an empty shell of a bill, then they don’t have to worry about “death panel” hysteria from some obscure subsection buried in the middle of the bill coming back to bite them.

    2. The funny thing (not haha funny, peculiar funny) is that I just got an email this morning from the partner who manages our financial services group. We’re basically organizing who will sit down, read, and decipher the possible tax effects in this thing. We’re the people who read these bills and figure out what will happen because of them. Meanwhile the people who caused this to become law won’t have half a fucking clue, even years from now.

      1. Enjoy your overtime paychecks!

  7. If the Rethuglicans hadn’t stalled the bill for so long, the regulations would already have been written and there wouldn’t be any uncertainty anymore. If the recovery stalls because of this bill being passed *now*, it’s the fault of the GOP for screwing up the careful timing that the President had planned.

      1. Squelching dissent. Who’s the Peronista now?

    1. It’s almost impressive that you can still talk while deep throating Obama like that.

      1. With this level of commentary, it’s a wonder I even bother with you people anymore.

        1. Feel free to stop “bothering with us people”. Really, we’ll be fine.

    2. If the Rethuglicans hadn’t stalled the bill for so long, the regulations would already have been written and there wouldn’t be any uncertainty anymore.

      That’s certainly useful to know.

      If the recovery stalls because of this bill being passed *now*, it’s the fault of the GOP for screwing up the careful timing that the President had planned.

      It’s like saying – if the patient had died in the street instead of in the hospital, then the mourners would be back to their lives by now. Damned doctors!

      1. My desire to vote straight GOP in November just went up a little bit more.

        And I despise the GOP.

      2. More like, if the patient had had a heart transplant three months ago they would have lived and prospered, but after the organ committee stalled and debated for so long it’s anyone’s guess whether it will do any good.

        1. Re: Hobie Hanson,

          Nah. This bill is nothing like a heart transplant, more like putting a second ugly head on Frankenstein’s monster.

        2. If your plan for economic recovery relies on passing and implementing a 2,300 page bill in May rather than June, may I suggest that your plan sucks balls?

  8. Under the new law, banks and other financial institutions will be overseen by a council of regulators. That group will be charged with identifying the kinds of “systemic” risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008.

    I just love the smell of just-brewed Fascism in the morning…

    1. More like Peronism I think.

      1. Only difference is that Evita was hotter.

        1. RACIST!!!

          1. Sorry, man, but the first lady ain’t nothing like Vanessa Williams.

        2. Yes she was.

        3. Argentina got Evita, and we’re stuck with a Tranny-looking Wookie who wears ammo belts.

          1. Ouch! Harsh but true. One sign of the media’s worship of Obama is how they all act as if Michelle is good-looking and has a fashion sense.

  9. Financial Reform Will Definitely Work After Regulators Figure Out How to Make It Work

    That would be the regulators who used to work on Wall Street and expect to return to Wall Street, right?

  10. LOL, IF they ever figure it out.

    Lou
    http://www.real-anonymity.net.tc

  11. Here’s another point worth noting

    “By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more campaign contributions, as they intervene in the regulatory process to influence the regulators,” says Thomas Ferguson, a professor of political science at the University of Massachusetts, Boston. “Nothing is settled. It’s a gold mine for members of Congress.”

    1. I wonder if that was the real point. Political points and financial gains all at the same time. Sounds like a politicians dream.

  12. Well shit. A Council. Why didn’t you you say so? Do they get to wear robes and shit?

    1. Yes, they will wear black-hooded robes, and meet in dark candle-lit halls where they will “consecrate the bond of obedience.”

  13. Evita was hotter.

    WAY hotter.

  14. This is not like Road to Serfdom in any way at all. I can’t believe all the kooks keep bringing up that book. It’s about England in 1946, and has no bearing at all on the USA in the present.

    And everybody knows, WE HAVE *ALWAYS* BEEN AT WAR WITH EASTASIA.

  15. “And it clearly won’t prevent the next crisis.”

    Somebody at some point should mention, prolly, that there’s this thing called the economic cycle. And a lot of it’s tied to lending…

    And we can’t regulate away the economic cycle.

    No really.

  16. The law sets broad guidelines for the existing patchwork of regulators ? including the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission ? and establishes bodies to oversee consumer protection and monitor “systemic risk.”

    Oh, so, now the justification du jour is: It’s for the consumers.

  17. Yeah, but Bush didn’t speak English all that great and Palin probably doesn’t read Hayek every night, and McCain is old!

    So I’m happy with Obama. We all get new chains next week! I hear I’m going to Gulag 3, which is the most libertarian of the new detention centers.

    1. Bush is an idiot. Therefore, Obama has all the right answers. If you don’t agree, you’re a homophobic racist!

  18. Oh, come on now guys. Everybody knows that the word “regulation” has a magical effect. All that has to happen is that Nancy Pelosi says “regulation” three times and turns herself about, and viola! All problems solved.

    And if it ends up not working, it’s because the ingrates (i.e. taxpayers) didn’t clap loudly enough.

    1. It’s a good thing you weren’t around when Congress passed the Constitution. You would have written some superficial, sophomoric, empty-headed criticism of that too.

      1. Don’t be his porn.

        1. You’re right. I should stop feeding trolls like that sandwich guy. I apologize.

          1. You don’t fucking count. You’re a fucking using whore.

      2. What, that it’s safeguards will eventually fail and we’ll be trapped in a corrupt and tyrannical system far removed from our lives or any sort of accountability or restraint we could impose on it.

        What a ludicrous claim to make.

      3. I’ll put you in a rose garden you fucking cunt.

    2. Nah, if it doesn’t “work”, they can just blame the Republicans for watering it down.

  19. This bill is nothing like a heart transplant, more like putting a second ugly head on Frankenstein’s monster.

    Frankenstein’s monster’s ASS, maybe.

  20. Wake me up when the Federal regulators cite the Federal government for engaging in “predatory lending”.

  21. Thank You Sir, May I Have Another !

Please to post comments

Comments are closed.