Financial Reform: Summaries & Reactions
The financial reform bill agreed to by a congressional conference committee last week is a significant piece of legislation designed to address some of the issues that helped to bring about the current recession. However, the legislation contains many compromises, and it is unclear whether or not it will address core problems.
For a summary of key provisions, see this useful rundown from The Washington Post.
Reactions to the legislation have been mixed.
Writes Marshall Auerback:
The whole approach to financial reform has failed to deal with the core problems with gave rise to the crisis in the first place. Credit default swaps, collaterised debt obligations, etc., need to be understood as key components of an integrated system, the so-called “shadow banking system”, which was at the epicenter of the crisis. More broadly speaking, the shadow banking system needs to be understood as a key component of the larger capital market-based credit system that has, in the last three decades, risen to supply the majority of our credit, largely replacing the traditional bank-based credit system.
Argues Naked Capitalism:
The only two measures I see as genuine accomplishments, the Audit the Fed provisions, and the creation of a consumer financial product bureau, do not address systemic risks. And the consumer protection authority was substantially watered down. Recall a crucial provision, that banks be required to offer plain vanilla variants of products, was axed early on. In addition, the agency, initially envisioned as independent, will now be housed in the Fed, which has never taken any interest in consumers (witness its failure to enforce the Home Owners Equity Protection Act, a rule which would have limited subprime lending) and has a long standing hands-off posture towards its charges.
Concludes Dean Baker of the Center for Economic and Policy Research:
“The creation of resolution authority for large non-bank financial institutions is also a positive step, although the fact that no pre-funding mechanism was put in place is a serious problem. Also, the audit of the Federal Reserve’s special lending facilities, as well as the ongoing audits of its open market operations and discount window loans, is a big step towards increased Fed openness.
…
“On the negative side, there is little in this legislation that will fundamentally change the way that Wall Street does business. The rules on derivative trading will still allow the bulk of derivatives to be traded directly out of banks rather than separately capitalized divisions of the holding company. The Volcker rule was substantially weakened by a provision that will still allow banks to risk substantial sums in proprietary trading.
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