When Greed Is Not Good, by Alan S. Blinder, Commentary, WSJ: …[W]hen the Treasury and Federal Reserve rushed in to contain the damage [from the financial crisis], taxpayers were forced to pay dearly for the mistakes and avarice of others. If you want to know why the public is enraged, that, in a nutshell, is why.
American democracy is alleged to respond to public opinion, and incumbents are quaking in their boots. Yet we stand here in January 2010 with virtually the same legal and regulatory system we had when the crisis struck in the summer of 2007, with only minor changes in Wall Street business practices… That’s both amazing and scary. Without major financial reform, “it” can happen again. …[H]istory shows that financial markets have a remarkable ability to forget the past and revert to their bad old ways. And we’ve made essentially no progress on lasting financial reform.
Perhaps reformers just need more patience. The Treasury made a fine set of proposals that the president’s … agenda left him little time to pursue—so far. The House of Representatives passed a pretty good financial reform bill late last year. And while there’s been no action in the Senate as yet, at least they are talking about it. …
But I’m worried. The financial services industry, once so frightened that it scurried under the government’s protective skirts, is now rediscovering the virtues of laissez faire and the joys of mammoth pay checks. Wall Street has mounted ferocious lobbying campaigns against virtually every meaningful aspect of reform, and their efforts seem to be paying off. …
My fear is that a once-in-a-lifetime opportunity to build a sturdier and safer financial system is slipping away. Let’s remember what happened to health-care reform … as it meandered toward 60 votes in the Senate. The world’s greatest deliberative body turned into a bizarre bazaar in which senators took turns holding the bill hostage to their pet cause (or favorite state). With zero Republican support, every one of the 60 members of the Democratic caucus held an effective veto—and several used it.
If financial reform receives the same treatment, we are in deep trouble, both politically and substantively.
To begin with the politics, recent patterns make it all too easy to imagine a Senate bill being bent toward the will of Republicans—who want weaker regulation—but then garnering no Republican votes in the end. We’ve seen that movie before. If the sequel plays in Washington, passing a bill will again require the votes of every single Democrat plus the two independents. With veto power thus handed to each of 60 senators, the bidding war will not be pretty.
On substance,… health care at least benefited from broad agreement within the Democratic caucus on the core elements… The fiercest political fights were over peripheral issues like the public option … and whether Nebraskans should pay like other Americans…
But financial regulatory reform is not like that. Every major element is contentious… What’s worse, several components would benefit from international cooperation… This last point raises the degree of difficulty substantially. No one worried about international agreement while Congress was writing a health-care bill.
All and all, enacting sensible, comprehensive financial reform would be a tall order even if our politics were more civil and bipartisan than they are. To do so, at least a few senators—Republicans or Democrats—will have to temper their partisanship, moderate their parochial instincts, slam the door on the lobbyists, and do what is right for America. Figure the odds. Gordon Gekko already has.
I’ve been arguing that the longer that congress waits to move on financial reform, the less likely it is that reform will be meaningful and effective. For example, here’s my response to “Don’t Let the Cure Kill Capitalism,” by Gary Becker and Kevin Murphy. They were worried that if we move too fast on regulatory reform, we will go overboard and undermine all the wonderful things that the financial sector has done for our economy:
When the golden goose is too wild for its own good, you can clip its wings without killing it.
While it’s possible that regulation will go overboard in response to the crisis, there are powerful interests that will resist regulatory changes that limit their opportunities to make money (and Nobel prize winning economists willing to back them up), so my worry is that regulation will not go far enough, particularly with people like Kashyap and Mishkin arguing that we should wait for recovery before making any big regulatory changes to the financial sector. They may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians, and by the time it is all over there’s every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that got us into this mess.
That was last March. Worries that moving on reform will undermine the stability of the financial sector have faded considerably, so even if you thought the stability argument was strong enough to overcome the arguments for moving forward back then (I didn’t), that objection is now hard to defend.
Will the reform we get will be meaningful and effective? It’s hard to have a lot of faith in Congress, I certainly agree with Blinder on that. But we have to do something, and the longer it takes to complete the reform process — the more we give in to the interests of those seeking to delay reform and undermine the process — the more likely it is that little will change.
Originally published at Economist’s View and reproduced here with the author’s permission.