A new era of financial regulation

What happened

President Obama this week signed into law the largest overhaul of the financial regulatory system since the Great Depression, a massive, 2,300-page statute that reverses two decades of deregulation and dramatically expands the federal government’s reach into the financial services industry. The measure significantly increases the federal government’s power to liquidate institutions, including non-banks such as AIG, whose collapse could threaten the financial system. It also establishes an agency to protect consumers from lending abuses, creates an oversight panel to monitor the financial system for risky practices, and imposes strict new limits on complex derivative contracts, which were widely blamed for fueling the 2008 financial meltdown. Full implementation will take years, while various regulatory agencies write the estimated 240 rules that are needed to put the law into practice.

The bill, spearheaded by Sen. Chris Dodd and Rep. Barney Frank, passed the Senate last week by a vote of 60–39, with three Republicans—Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine—voting for passage. The other Republicans argued that the measure would make credit harder to obtain, while doing nothing to reform Fannie Mae and Freddie Mac, the federally controlled mortgage finance agencies that facilitated the subprime lending boom.

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What the editorials said

Despite all those pages, said The Detroit News, Congress in fact passed a “shell bill.” It leaves most of the crucial details of enforcement up to unelected regulators, so there’s no telling how far into the market this reform will eventually reach. But at the very least, the high costs of complying with all these new rules could force smaller institutions into the arms of bigger banks, “making the ‘too-big-to-fail’ banks even more dominant.” Brace yourselves for “historic levels of red tape,” said The Wall Street Journal. And there’s no “expiration date” on this unprecedented assault on free enterprise. “The rule-making possibilities are endless.”

Desperate times call for desperate measures, said The Philadelphia Inquirer. The law creates a much-needed “framework for tougher monitoring and regulation of a system that spun out of control.” Regulators were granted the power to “dismantle failing institutions before the harm spreads through the financial system.” But that will require regulators who are “savvy enough to use the bill’s powers to head off an unanticipated threat to the economy,” said the San Jose Mercury News. The reform is a good start, but it will all come down to whether future regulators—no matter which party is in power—are up to the task.

What the columnists said

Anyone who believes more regulation will prevent another meltdown needs a refresher course in history, said Terry Savage in the Chicago Sun-Times. The Securities and Exchange Commission was created to protect investors from scam artists like, say, Bernie Madoff. Oops. The FDIC was created to stop banks from feeding a “speculative mortgage frenzy.” Never mind. “If all those agencies and regulations could not keep this massive bubble from building then bursting, will the new regulations do it?”

Maybe, said Ezra Klein in The Washington Post. “The next time there’s a financial crisis, regulators will say a quick prayer of thanks” that they have the ammunition to respond. But let’s not lose our heads. The reform doesn’t really fix “the weaknesses and imbalances that led to the financial crisis,” such as the income inequality that drove so many consumers to borrow beyond their means. “The bill is medicine—it’s primarily about helping the doctors figure out how to make you better. It doesn’t dramatically change the conditions that made you sick in the first place.”

In the end, said David Weidner in Marketwatch.com, consumers must look out for themselves. The law does establish an agency to protect consumers from being gouged by lenders. But we consumers must still resist the lure of easy credit. After all, we did our part to inflate the bubble: “We were addicted to spending just as much as Lehman Brothers and Bear Stearns were addicted to trading profits.” Wall Street needs to change, but so do we.