20 December 2009

Missed Opportunity For Real Financial Reform

Business Week: A Crisis Is a Terrible Thing to Waste
This should have been the year of radical financial reform

In 2009 we wasted a perfectly good financial crisis.

With disastrous economic events accumulating in March, President Barack Obama exhorted listeners during a weekly radio talk to "discover great opportunity in the midst of great crisis." It's an appealing conceit: seeking breakthrough achievement in a time of danger.

That's why it's such a shame we didn't take advantage of the Wall Street crisis of 2008 by making 2009 the Year of Real Financial Reform.

Instead, the Obama Administration offered half-measures. The financiers lobbied against even modest reforms, and a Congress drenched in Wall Street campaign cash has peppered proposed regulation with loopholes.

At a conference in the U.K. on Dec. 8, Paul A. Volcker, the former chairman of the Federal Reserve and an Obama adviser, addressed an audience of bankers and executives who were insisting that Wall Street and big corporations can police themselves, without more government scrutiny. "Wake up, gentlemen," Volcker said, according to media reports. "Your response is inadequate."

With popular skepticism toward Wall Street at a peak in early 2009, our political and business leaders did...nowhere near enough. The White House bought the Wall Street line that bigger is better, or at least unavoidable. Now the banks are larger and more intricate than ever. As The Wall Street Journal noted recently, the world's 10 biggest banks account for about 70% of global banking assets, up from 59% three years ago.

The implicit taxpayer safety net—now explicit—means that some bankers almost certainly will engage in the kind of risk-taking that brought us the subprime fiasco. Why not? Someone else will clean up the mess.

The tame alternative to real regulation is greater transparency. And, yes, we will have more disclosure of credit-derivatives trading.

Lawmakers backed away from any serious attempt to slow the invention of novel exotic trades whose side effects few, if any, really understand.

The list of missed opportunities is too long for one humane sitting.

Congress roughed up some rating-agency executives at hearings and may yet require more disclosure here, too. But the basic conflict persists. Genuine reform fizzled. We'll regret it when the next crisis hits.

No comments: