When Krugman is critical of a Dem proposal, lol, I tend to notice quickly. LOL

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Making Financial Reform Fool-Resistant

The White House is confident that a financial regulatory reform bill will soon pass the Senate. I’m not so sure, given the opposition of Republican leaders to any real reform. But in any case, how good is the legislation on the table, the bill put together by Senator Chris Dodd of Connecticut?

Not good enough. It’s a good-faith effort to do what needs to be done, but it would create a system highly dependent on the wisdom and good intentions of government officials. And as the history of the last decade demonstrates, trusting in the quality of officials can be dangerous to the economy’s health.

Now, it’s impossible to devise a truly foolproof regulatory regime — anyone who believes otherwise is underestimating the power of foolishness. But you can try to create a system that’s relatively fool-resistant. Unfortunately, the Dodd bill doesn’t do that.

As I argued in my last column, while the problem of “too big to fail” has gotten most of the attention — and while big banks deserve all the opprobrium they’re getting — the core problem with our financial system isn’t the size of the largest financial institutions. It is, instead, the fact that the current system doesn’t limit risky behavior by “shadow banks,” institutions — like Lehman Brothers — that carry out banking functions, that are perfectly capable of creating a banking crisis, but, because they issue debt rather than taking deposits, face minimal oversight.

The Dodd bill tries to fill this gaping hole in the system by letting federal regulators impose “strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.” It also gives regulators the power to seize troubled financial firms — and it requires that large, complex firms submit “funeral plans” that make it relatively easy to shut them down.

That’s all good. In effect, it gives shadow banking something like the regulatory regime we already have for conventional banking.

But what will actually be in those “strict rules” for capital, liquidity, and so on? The bill doesn’t say. Instead, everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.

Mike Konczal of the Roosevelt Institute, whose blog has become essential reading for anyone interested in financial reform, has pointed out what’s wrong with this: just consider who would have been on that council in 2005, which was probably the peak year for irresponsible lending.

Continues @ The New York Times

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Krugman makes a couple of very valid points. This is a case where banks and "bank-like" operations need to be reigned in to some degree. "Shadow banks" have escaped scrutiny and continue to create risky operations.  It is interesting to find Lehman Bros in that category!  They sure can grow!!

What we know is that these banks can create derivative assets and trade on them ad infinitum and now they have a taste of the taxpayer money backing them up ever since the 2009 Fall bailout.  Regardless of how much of that got recovered (and from whom - because not all of it has been recovered yet and some are doggedly in the red), it is imperative that we put major curbs on derivative trading. I do not see any mention of that in the above article. If Krugman is not forcing that issue to the fore, I have to wonder.

I do not know if many of you are interested in following the financial reform topic. I have been reading a lot on this and gathering my thoughts. I plan on writing to reps. If you have formulated your thoughts please share. Thanks.

[Some kind of financial reform WILL go through I think. We just have to get SPECIFIC input into our Reps.]


-- Edited by Sanders on Tuesday 6th of April 2010 12:16:17 AM