Financial Reform Endgame

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Tijd voor de rest van de wereld om tot aktie te komen?
Of gaan ze nog een paar keer bukken?

Groet / Cees

March 1, 2010
Op-Ed Columnist
Financial Reform Endgame
http://www.nytimes.com/2010/03/01/opinion/01krugman.html
By PAUL KRUGMAN

So here’s the situation. We’ve been through the second-worst financial
crisis in the history of the world, and we’ve barely begun to recover:
29 million Americans either can’t find jobs or can’t find full-time
work. Yet all momentum for serious banking reform has been lost. The
question now seems to be whether we’ll get a watered-down bill or no
bill at all. And I hate to say this, but the second option is starting
to look preferable.

The problem, not too surprisingly, lies in the Senate, and mainly,
though not entirely, with Republicans. The House has already passed a
fairly strong reform bill, more or less along the lines proposed by the
Obama administration, and the Senate could probably do the same if it
operated on the principle of majority rule. But it doesn’t — and when
you combine near-universal Republican opposition to serious reform with
the wavering of some Democrats, prospects look bleak.

How did we get to this point? And should reform advocates accept the
compromises that might yet produce some kind of bill?

Many opponents of the House version of banking reform present their
position as one of principle. House Republicans, offering their
alternative proposal, claimed that they would end banking excesses by
introducing “market discipline” — basically, by promising not to rescue
banks in the future.

But that’s a fantasy. For one thing, governments always, when push comes
to shove, end up rescuing key financial institutions in a crisis. And
more broadly, relying on the magic of the market to keep banks safe has
always been a path to disaster. Even Adam Smith knew that: he may have
been the father of free-market economics, but he argued that bank
regulation was as necessary as fire codes on urban buildings, and called
for a ban on high-risk, high-interest lending, the 18th-century version
of subprime. And the lesson has been confirmed again and again, from the
Panic of 1873 to Iceland today.

I suspect that even Republicans, in their hearts, understand the need
for real reform. But their strategy of opposing anything the Obama
administration proposes, coupled with the lure of financial-industry
dollars — back in December top Republican leaders huddled with bank
lobbyists to coordinate their campaigns against reform — has trumped all
other considerations.

That said, some Republicans might, just possibly, be persuaded to sign
on to a much-weakened version of reform — in particular, one that
eliminates a key plank of the Obama administration’s proposals, the
creation of a strong, independent agency protecting consumers. Should
Democrats accept such a watered-down reform?

I say no.

There are times when even a highly imperfect reform is much better than
nothing; this is very much the case for health care. But financial
reform is different. An imperfect health care bill can be revised in the
light of experience, and if Democrats pass the current plan there will
be steady pressure to make it better. A weak financial reform, by
contrast, wouldn’t be tested until the next big crisis. All it would do
is create a false sense of security and a fig leaf for politicians
opposed to any serious action — then fail in the clinch.

Better, then, to take a stand, and put the enemies of reform on the
spot. And by all means let’s highlight the dispute over a proposed
Consumer Financial Protection Agency.

There’s no question that consumers need much better protection. The late
Edward Gramlich — a Federal Reserve official who tried in vain to get
Alan Greenspan to act against predatory lending — summarized the case
perfectly back in 2007: “Why are the most risky loan products sold to
the least sophisticated borrowers? The question answers itself — the
least sophisticated borrowers are probably duped into taking these
products.”

Is it important that this protection be provided by an independent
agency? It must be, or lobbyists wouldn’t be campaigning so hard to
prevent that agency’s creation.

And it’s not hard to see why. Some have argued that the job of
protecting consumers can and should be done either by the Fed or — as in
one compromise that at this point seems unlikely — by a unit within the
Treasury Department. But remember, not that long ago Mr. Greenspan was
Fed chairman and John Snow was Treasury secretary. Case closed. The only
way consumers will be protected under future antiregulation
administrations — and believe me, given the power of the financial
lobby, there will be such administrations — is if there’s an agency
whose whole reason for being is to police bank abuses.

In summary, then, it’s time to draw a line in the sand. No reform,
coupled with a campaign to name and shame the people responsible, is
better than a cosmetic reform that just covers up failure to act.

**********
Dit bericht is verzonden via de informele D66 discussielijst (D66 at nic.surfnet.nl).
Aanmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SUBSCRIBE D66 uwvoornaam uwachternaam
Afmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SIGNOFF D66
Het on-line archief is te vinden op: http://listserv.surfnet.nl/archives/d66.html
**********