Conventional Beltway thinking says that 'some sort of financial reform package' will be passed fairly soon.  The bill that's already been passed in the House  apparently has some strengths that Chris Dodd's Senate bill lacks, but both appear weak enough to be dangerous: if a weak bill passes, true reform won't be enacted for a long time.

  I thought I'd let you know what a few ecomists I like are saying about it, plus one I don't care for...(grin).

  Some of us had hoped that Chris Dodd might leave us a going-away (his) gift, and craft a tight, meaningful bill, but it looks like that ship has sailed.  He'd been working on it with Senator Bob Corker, and has been throwing his hands up as the bill got weaker and weaker, saying in effect, "The Republicans won't agree to this or that."  Even after Corker walked out on the negotiations!  (Remember: Dodd has been one of the highest recipients of Bank Lobby money.)  And most people agree that it will tough to find any Republicans who will vote for any of the bills that emerge, unless National Shame causes them to get real on the issue.

  We want to believe that the Obama Administration wants true reform, but that's getting harder to believe.  The President had spoken lavishly in praise of a Consumer Protection Agency (a la Elizabeth Warren).  Her preferred model would have created a stand-alone, independent agency that wouldn't be as likely to be buffeted by Political Winds.  The White House has been steadily yielding to the Federal Reserve: it wants the CFPA to be under its umbrella, and offers dire warnings about the alternative.

  Given the Fed's abysmal track record in protecting consumers, critics say that idea would be lame at best.  They point out that the same regulators that helped cause the current crisis are still there, and they doubt too many of them have had grand epiphanies of regulatory zeal that would protect us.  Hard not to see it their way, in my opinion.

Within days of Scott Brown's win in Massachusetts, Obama appeared with Paul Volcker at his side, and announced his backing of 'The Volcker Rule.'  Volcker has long been a proponent of re-enacting Glass-Steagall, the post-depression law that required commercial banks to be separated from investment banks; even the Volcker rule seems to have been watered down now, too many loopholes in terms of end-users, bank capitalization, etc., with the approval of the White House. 

  Paul Krugman

  Paul's recent column refutes the need for the Big Banks to be broken up; he points out that Canadian banks which were well-regulated didn't suffer the same toxic meltdowns as American banks, plus he believes that several smaller banks' failures could cause equal havoc.  He is calling for stronger regulatory authority over the Shadow Banking System so that they can be seized by the FDIC when they are in crisis, and he advocates for 'prudent limits on shadow banks and adequate capitalization.'

I  used to like Krugman's take on policy; I disagree a lot lately.  Ever since the President called him and Joseph Stiglitz to the White House for dinner in May, ostensibly to dull their criticism of his economic pooicy, he has become a tame kitten, in my opinion.  (Sorry, Paul; we all have heard the stories of the Power of the Oval... ) 

You might enjoy the link; it's some of the Cafe's finest wondering about that May dinner conversation.  And Psssst...the meal didn't shut Stiglitz up!

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 European Rock-star economist Joseph Stiglitz (and most quoted economist in the world), weighed in recently via Politico: ( a synopsis)

  Wall Street bucked regulatory reform, hoping that the economy would recover, then reform would be a moot point.  Wall Street recovered, the people's economy did not.The regulatory bodies failed us, and unless regulations are 'hard-wired' into the system, regulatory failure will happen again. 

  Stiglitz says there is plenty of talk about the need to balance consumer protection with bank soundness and safety, much like the different tasks the Fed is charged with; guess whose protection gets the most care?  He reminds us that predatory lending is bad for the health of the entire system, which conclusion seems to be lost on Big Banks, who he declares already know that when they run risky operations, feel unencumbered by downside: they know taxpayers will bail them out again if necessary.  It's not a free market, he says, when banks aren't required to be adequately capitalized allowing them to lend capitol at lower rates than small banks; they are effectively subsidized by taxpayers.  He also claims that the current consumer protection bills exempt most American Banks. (Really?)

He wants derivatives posted on exchanges with full transparency, naming the counter parties, etc., and is calling for an end to 'naked credit default swaps', or betting on institutions or even countries, to fail.  He worries that the exchanges that might be created would lack sufficient capitalization, and that once again Uncle Sam would be bailing them out. 

There is a remedy, he says: Make all those trading in the exchanges jointly and severally liable for the losses. (Yikes, Stiglitz getting is tough; never gonna happen, but...)

Break up the big banks, restrict their activities, and prevent them from over-leveraging.

Make the Fed a public entity, and subject to FOIA requests with 'narrow, carved-out exceptions.' (Note: Alan Grayson's Audit the Fed Amendment apparently made it into the House bill.)
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  Simon Johnson, former policy director at the IMF has been working the regulatory issue as hard as any one man I've seen; he goes everywhere and anywhere to give talks to people who will listen from policy wonks to John and Jane Does.  He is on a mission (yeah, he has a new book out, too; 13 Bankers; but still...)

  His take at this point seems to be that the Dodd bill is ineffective for many reasons, number one being that the White House and the Fed believe that Congress is incapable of writing regulatory rules.  It's patently absurd; there are some great minds on finance in the key committees.  It's a dodge.  As Johnson explains it, the Volcker rule could only be invoked if an economic council studied a bank, then okayed it, which is code for trusting regulators to assess risk, and unwind a bank.  He again points out that that Bernanke, Geithner, et.al. (Regulators of the Highest Order!) failed us in spades.

Johnson is supporting the amendment being offered by Rep. Paul Kanjorski who is on the Financial Services Committee.  Johnson says:

This amendment will allow federal regulators to preemptively break up large financial institutions that - for any reason - pose a threat to financial or economic stability in the United States. (Yes, there is a weak version of this idea currently in the Dodd draft, but it is very weak - allowing regulators to act "only as a last resort"; see p.3 of the official bill summary.)

Representative Kanjorski has exactly the right idea, but we need to go a step further - because we cannot at this point reasonably expect regulators to implement properly. Remember, in the Catch-22 type nature of these issues, the regulators can easily say: Implicit in Congress's decision not to mandate a break-up, will infer a congressional intent that no institutions currently meet the criteria.

The reality is this. As documented in 13 Bankers (see Chapter 7), six banks currently fit the Kanjorski criteria - they are, by any definition, "too big to fail." Congress should mandate their break-up rather than leaving this to the judgment of regulators.

We can discuss the best language and exact terms but the broader point is that we need change by statute, not "after further study."