I haven’t commented much on FinReg, mainly because I don’t have much novel to say. I’m excited about the prospect of someone like Elizabeth Warren running CFPB, but the direct impact of that bureau will be limited in its onset. Months back, I reviewed David Westbrook’s excellent book, Out of Crisis– unfortunately, Westbrook doesn’t blog, but he does email. He graciously is letting me post his responses to a reporter for another publication on Dodd-Frank:
In Out of Crisis: Rethinking Our Financial Markets, I try to reconsider financial market regulation, and by extension, political economy. While I support many of Dodd/Frank’s provisions in a general sort of way, at the philosophical level, I do not think we have come nearly far enough – we have not learned enough from this crisis – and the Act reflects that. So the political discourse surrounding most of the Act is rather well-rehearsed. None of which is very surprising; cultural learning does not happen very often. This is important legislation, and there is much new in it, but most of the thinking that underlies the bill is rather familiar.
Although this legislation is inevitably compared with the 1930s, the comparison should not be pushed too far. In the 1930s, the United States introduced a new philosophy of governing financial markets, based largely on disclosure and transparency as prerequisites to market activity. That philosophy really swept the globe; you see it when a Chinese bank does a big IPO. At the same time, the federal government began regulating institutions and entire industries that had been the responsibility of the states. At least on the text of the Act, and depending to some degree on how authority granted by the Act is actually employed, it does not look like any steps of similar intellectual or constitutional magnitude have been taken by this Congress.
However, let me make the argument on the other side. It is unlikely, but possible, that the government will start taking systemic risk seriously, and acting on that impulse. If that happens, if, for example, the government starts breaking up companies, so they did not get too big to fail, or assumes oversight of systemically important insurers, then the Act would have inaugurated change of a magnitude that stands comparison with the 1930s.
I’ve argued that such a total reconsideration of how we think about markets would be good. Frankly, however, I do not see that happening in the current political climate.
All those things said, many of the things that Dodd/Frank accomplishes – or will accomplish, if the agencies in fact regulate as Congress expects – are quite sensible…
What we do know is that lots of things went wrong, in lots of markets, in the plural. It is important to keep in mind that the financial markets, particularly in the United States, are numerous and vast: the credit card market is not the market for auction rate securities is not the market for municipal debt is not the market for corporate equity is not the market for interest rate swaps . . . you get the picture. So one of the problems is thinking about a network of discrete, but interconnected, markets. And at this level, I do not think the Act accomplishes much.
What Congress has done, however, is address a number of perceived abuses or weaknesses in various financial markets. Most of these markets had problems over the last years, and the Act addresses very, very many of these problems, in an effort to improve the soundness of the markets.
I think progressives, liberals, and radicals alike are disappointed with responses to this crisis in a number of ways. There’s a deep sense that result-oriented pieces, like the stimulus, have been weak tea. However, the assumptions underlying any given response to the crisis must also be analyzed. Westbrook, by comparing the current moment to the New Deal, explicitly raises this side of analysis, and it isn’t pretty. Whatever the causes (regulatory capture, political cravenness, et al.), it is undeniable that pre-crisis thinking is shaping the reaction, or at very least that a new way of thinking is not reshaping policy. By leaving systemic risk regulation up to regulators, we depend on regulators who are willing to think differently; if rethinking is not happening at the high levels, why should we expect it to at the lower levels?
There aren’t ready solutions to this issue- the bill as it is has come together from many political forces, while the intellectual sphere has moved closer (but not close enough) to a relevant rethinking. Perhaps these battles can’t be won in the realm of politics, or at all.