This is a post that appeared on my MoneyWatch blog, but upon further reflection, I'm not so sure about this one -- maybe I was in too much of a rush. I was supposed to be traveling to a conference in Europe today, and I needed posts that I could set to appear automatically while I was traveling, so I figured I'd set this one for about the time I was taking off for Budapest. That way, I'd have a good reason to ignore the inevitable comments telling me what an idiot I am -- even if I tried, travel would make it hard to get to them. However, I had to cancel the trip at the last minute, and I thought about canceling this post too. But what the heck, I'm never satisfied with posts after the fact, so I'll post it anyway. Maybe it's OK after all.
The post argues that perhaps we were in too much of a rush to pass financial reform legislation, and that explains the disappointing outcome. But what made me reconsider was an argument I read somewhere along the lines that "it took all this time to get legislation done, and this is the best they could do?" I still think that in legislative time, this was undertaken relatively quickly, that more patience might have helped, but it has been several years since we knew their were big problems to solve so it's not as though the legislation was rushed from day one. In any case, the main question I want to take up now is the quality of the legislation we're likely to get:
Reconsidering the Rush to Reform the Financial Sector, Maximum Utility: I wish I could say that the financial reform legislation that is under consideration in Congress makes the best possible attempt to insulate the financial system from problems in the future, but I can't make that claim. The legislation still needs to go through reconciliation to bring the House and Senate versions together, but the reforms that appear set to be enacted feel like a hodgepodge of measures rather than a set of consistent laws and regulations designed to counteract the fundamental failures within the financial system. The policies that emerged seemed to depend on what was possible rather than an overriding sense of the fundamental issues that needed to be addressed.
I had hoped that financial legislation would proceed by first identifying the major problems that caused the crisis or amplified its effects, and then by putting specific measures into place designed to fix those problems. But that's not how it went. Instead, it seemed like it was a little bit of this and a little bit of that with no real sense of overall purpose.
Maybe we were in too much of a hurry. I was one of those who made the following argument:
Kashyap and Mishkin ... may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians. By the time it is all over there's every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that go us into this mess.
I thought that if we didn't hurry up and do something, we wouldn't get anything done at all (as passions fade, etc.), so it was better to go forward and perhaps get imperfect legislation than to wait and get nothing at all.
I wanted to strike while the iron was hot, but what I underestimated is the ability of politicians to heat things up. That's what politicians do, they create the passions that allow legislation to go forward (or to block it as the case may be). I am not claiming that the timing of the announcement of the Goldman Sachs investigation was politically motivated, i.e. connected to the reform legislation that was being considered in Congress, but it did show how easily passions can be inflamed with the right triggers. Politicians and their allies in the media are experts at finding and exploiting those triggers, so perhaps I was in too much of a hurry to push financial regulation forward. Patience may not have been so costly in terms of waning support as I first thought, and it may have allowed us to better identify the problems in the financial sector and then find the solutions that are needed to insulate it from further problems.
We couldn't have waited too long. It's still true that things fade over time, including the ability of politicians to whip up passion on an issue, but perhaps a little more patience would have produced legislation that does a better job at first identifying the problems that need to be fixed, and then crafting specific, workable regulatory solutions to those problems. I'm still not fully convinced that waiting longer was the right thing to do. I still worry that it gives the opposition too much time to put up obstacles to reform -- the opposition can whip up the public's passion too -- and that the public's anger fades over time. But seeing the legislation that actually emerged, and having the sense that it is not as effective as it could be due to the somewhat ad hoc way it was put together, I'm much more open to arguments that patience would have produced a better outcome than I was before.
I'm clearly not all that impressed with the legislation. I don't think the leverage restrictions are tough enough, I don't understand why we allow firms with enough political and economic power to manipulate their environment to persist, the ratings agencies need reform (though there is some progress here), there are incentive problems throughout mortgage and financial markets that need to be fixed, and the legislation is not as focused, cohesive, and encompassing as it should be.
What's your view on the legislation that is likely to emerge from reconciliation? Is it as good as we can expect, or is it far short of what could and should have been accomplished?