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Monday, August 04, 2014

Paul Krugman: Obama’s Other Success

Financial reform is working:

Dodd-Frank Financial Reform Is Working, by Paul Krugman, Commentary, NY Times: ...The Dodd-Frank reform bill ... is working a lot better than anyone listening to the news media would imagine. Let’s talk, in particular, about two important pieces of Dodd-Frank: creation of an agency protecting consumers from misleading or fraudulent financial sales pitches, and efforts to end “too big to fail.”
The decision to create a Consumer Financial Protection Bureau shouldn’t have been controversial, given what happened during the housing boom. ...
Of course, that obvious need didn’t stop the U.S. Chamber of Commerce, financial industry lobbyists and conservative groups from going all out in an effort to prevent the bureau’s creation or at least stop it from doing its job, spending more than $1.3 billion in the process. Republicans in Congress dutifully served the industry’s interests...
At this point, however, all accounts indicate that the bureau is in fact doing its job, and well... But what happens if a crisis occurs anyway?
The answer is that, as in 2008, the government will step in to keep the financial system functioning; nobody wants to take the risk of repeating the Great Depression.
But how do you rescue the banking system without rewarding bad behavior? ...
The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save “systemically important” banks and other institutions without bailing out the bankers.
Bankers, of course, hate this idea; and Republican leaders like Mitch McConnell tried to help their friends with the Orwellian claim that resolution authority was actually a gift to Wall Street, a form of corporate welfare, because it would grease the skids for future bailouts. ...
Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

    Posted by on Monday, August 4, 2014 at 12:24 AM in Economics, Financial System, Regulation | Permalink  Comments (70)

          


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