Financial INstitution Regulation--Dodd's proposals

Well over a year into the financial crisis, we still have no new approach to too big to fail (TBTF) banks, no new approach to exotic derivatives including synthetic CDOs, credit default swaps and others; no new approach to foreclosures; no new approach to regulation of the speculative, nonproductive activity that results in huge paychecks for a few thousand bankers and huge risk passed along to ordinary people through an implicit government guarantee.  It's time to act, and action means doing some things that won't be liked by those who benefited from the bailout of banks and from the return to making money on trades instead of banking.  Does this Congress have the gumption to do it?

Chris Dodd, chair of the Senate Banking Committee, has unveiled an ambitious plan for regulatory reform of the financial sector.  The Fed would not be the overseer of banks but would be confined to its appropriate role of setting monetary policy.  Consumer protection and bank regulation would be taken out of the Fed and put into a new regulatory agency.  The Fed doesn't like it, of course; it asserts that regulating the big banks is part of the task of guiding the economy.  See Cho, Dennis, and Irwin, Dodd's reform plan takes aim at the Fed, NY Times (Nov. 11, 2009).  LIke the administration, Dodd's plan would also impose tougher capital standards and leveraging restraints, establish a new consumer protection agency, and punish financial institutions for recklessness.  Geithner was making nice but apparently only because Frank had explained to him the considerable depth of the people's revulsion for the extent to which the Fed has aimed at returning us to the status quo ex ante of big banks that take a federal guarantee for granted so that losses are socialized, gains are privatized.

The Times reports that Bernanke "views the Fed's role in supervising banks as core to its mission."  If that is so, why didn't the FEd do a better job of it back when this crisis was under development?  And why have banks like Goldman and others been able to benefit magnificently from the federal guarantee and bailout of AIG, yet get away with claiming that they were "fully hedged" and so had no fears of loss?

Comments

[Raza]

Excellent post, Linda. I could not agree with you more on this. Keep up the great, intelligent, and insightful postings.