The Age of Deform: Arnold Kling & The Financial Reform Bill

Arnold Kling takes a grim look at what the 3,000 pages of financial reform bills, as currently drafted, will do for stabilizing and regulating the financial industry. (Hint: not very much): What Financial Re-Regulation?

As I have said before, there is no coherent narrative that connects an analysis of the causes of the crisis to the financial reform legislation as written. Rather, the bill serves to deflect blame from government's role in pursuing housing policy through dubious mortgage market intervention and from the mutual overconfidence of large financial institutions and their regulators.

The new law is not re-regulation. The regulations it contains are largely irrelevant to financial stability. And potential regulations that would improve financial stability (such as increasing the use of subordinated debt to discipline banks or requiring sizable down payments on mortgages) are not in the bill.

As Kling notes, the bills do nothing to address the problems that led to the Crash of '08. The bills are silent on the issues of Fannie & Freddie. It does not reinstate Glass-Steagall, the liberal's favorite event to point to as causing the crisis. More important, the investment vehicles that supposedly caused the most trouble - SIV's, CDO's, derivatives, etc. - did not come about as a result of some sort of short-sighted "de-regulation," Rather, they were set up to work within the existing regulatory format. And, this is my favorite part:

Perhaps the centerpiece of the new legislation is a consumer protection agency for financial products. But if the core problem was a lack of consumer protection, what we should have seen was banks extracting profits from loans and foreclosures. Instead, banks got wiped out by losses. As Tyler Cowen points out, given where the losses took place we should be talking about predatory borrowing.

"Predatory borrowing." Hee Hee. Good one.

It's hard to believe that this is the best we can do. I keep hearing commentators say that Congress is working to make sure they "get this right" (smirk) because these regulations have to be good for decades. They do?? It seems like we are replacing an opaque system that favored insiders with an even more complex and opaque system that does nothing to address the problems that are left over from the failed regulations of the past. And everyone thinks that, whatever we come up with now, it will be set in stone for decades? We're not allowed to revisit this ever again? Next, we'll be hearing people say "This time is different."