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FinReg’s Finished

July 16, 2010

I’ve not been particularly critical of the FinReg bill, which is set to become law as soon as the President signs it, because Congress basically pursued financial regulation in an entirely different direction than the way I would have approached it.  From the get-go it was clear that Barney Frank and Chris Dodd were more interested in getting tough on shadow banking and establishing some form of consumer protection than they were in assessing leverage and preventing financial meltdowns (and, by extension, bailouts).

The final bill contains pretty serious derivatives restrictions, a weird version of the Volcker rule, a stand-alone Consumer Financial Protection Agency, and a weak resolution authority.  I suppose there are a few good things about this.  The actual odds of future bailouts will indeed decline, and shifts more responsibility in monitoring securitization from the feds themselves to firms, but ultimately, the bill still leaves too much trust and power to federal regulators and it fails to address some serious issues.

As Eli Lehrer notes, the new Financial Stability Oversight Council basically has the power to do whatever it wants with financial institutions based on what I guess are its members’ opinions — they essentially have the clout to break up anybody they think is too big or over-leveraged.  I don’t see that the new resolution authority does anything to prevent firms from setting themselves up for a situation in which there is more pressure on politicians to bail said firms out than there is to allow for resolution to occur.  The limits on interchange fees are going to benefit retailers at the expense of consumers, and banning overdraft fees will spell the end of free checking — plus, neither of those things have anything to do with financial reform.  Oh, and the problems at Fannie Mae and Freddie Mac were just left completely out of the picture.

Of course, Congress could always go back and address the GSEs, and the FSOC could theoretically work out a lot better than skeptics like me are predicting.  But this particular Congress is already being touted as one of the most “productive” in history, so it’s doubtful that anything else will happen prior to the November elections in which the GOP is expected to clean house.  If that happens, then maybe Republicans can voice some concern over the GSE issues, because as we’ve seen, the Democrats aren’t interested.

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