Siglitz’s Freefall and now Johnson and Kwak’s 13 Bankers both do a good job of navigating a complex situation to provide a comprehensible account of the economic crisis for the interested nonexpert. And both offer appealing solutions of financial reform through regulation and government intervention in markets. However, I have not yet seen any account that really explains how financial innovation, in the real world, can be regulated and how any solution will avoid repeating cycle that we have just endured. The crisis is not even over, and Wall Street is already planning tactics to skirt the regulatory measures that will be imposed on them. Kevin Drum at Mother Jones suggests why the financial system may not really change:
Politically, the obvious play for both parties is to outbid each other in efforts to rein in Wall Street, which practically everyone in America hates. But even though this would be an enormous vote getter, neither party is doing it. Democrats are offering up some mild reforms that would modify the playing a field a bit but not really fundamentally change anything. Republicans won’t even go that far. Apparently motivated by industry fealty and a desire to simply oppose anything Democrats offer up, they’re unwilling to support even modest reforms.
It’s hard to know what to think about this. If your city were nearly destroyed by a huge earthquake, proposing better building standards would be an obvious response. It wouldn’t be a left vs. right thing, it would be a property developers vs. everyone else thing. The financial meltdown of 2008 was like that. It exposed such massive fault lines in our banking system that outrage really shouldn’t be a left vs. right thing. It should be a big banks vs. everyone else thing. But the intellectual and monetary hold of Wall Street on our political class is so overwhelming that it was able to turn the whole affair into just another excuse for the usual partisan bickering. The winners, of course, will be the big banks.
Is it inevitable that the big banks be the winners? Or does someone have a proposal for how regulation can actually be implemented? And a reform that will inhibit Wall Street from sidestepping the regulation (like they did over the course of the past three decades) and landing us in a mess all over again?