Dodd's Financial Reform Proposal

I'm still waiting for Congress to take real action to deal with the hegemony of huge financial institutions, including the "shadow banking system" of hedge fund ownership of banks and other institutions.

Last week, I noted that Dodd has come out with a bill that does not pretend to hoe the party line.  Whether that is good or not remains to be seen.  But at least discussion of these issues seems tobe heating up again, now that we are a full year past the Sept. 2008 blowup.

Here are some useful links on these issues.

• the discussion draft of Dodd's bill
• Summary of Discussion Draft
• Dodd, Banking Committee Deomcrats Unveil Comprehensive Financial Reform, Senator Dodd website (Nov. 10, 2009) 
• Financial STability Bill: Loopholes Destabilize It, Karl Denninger (Nov. 16, 2009) (setting out several key criticisms of bill's provisions)
• Another Cost of Too-Big-to-Fail, James Kwak (Nov. 16, 2009) (addressing the value for TBTF institutions in terms of their savings on costs of funds--amount to 29 basis points from 2000-2007 and 78 basis points from fourth quarter 2008 through second quarter 2009)
• The National Review: The Wrong Financial Fix, NPR (Nov. 12, 2009) (weighing in to claim that the Dodd approach is wrong because it is "undermining the institutions that have performed relatively well, such as the FDIC, politicising the Federal Researve, and creating a raft of new regulators with disconsonant mandates")

The FDIC's main failing was its decision to stop collecting insurance premiums from the banks it backstops for a decade. Had it collected them, it would have had a much more comfortable capital cushion during this crisis. The Fed's failings were more complex: ignoring the asset-price bubble in housing because rising home prices make homeowners happy, missing the fact that securitization had served to concentrate risk rather than to disperse it, and suffering from a consequent inability to foresee the deep and interlocking dangers presented to the world financial system by the housing bubble. (And it bears keeping in mind that the housing bubble itself was in no small part the outcome of longstanding government policies.)