Dodd Not Enough

Mike Konczal at Rortybomb has a useful post today on what we should want from financial reregulation. It is clear that the Dodd bill is not enough. However, the way the political theatre is working out, will we see even a weaker version of Dodd passed with bipartisan support? I can readily see this happening. We need a stronger verions of the Lincoln derivatives bill and the Brown-Kaufman SAFE banking act, and the Volcker Rule (a new version of Glass-Steagall) for three things.

Here is an article by George Soros arguing for much stronger regulation of derivatives. It raises the question once again; what are these things good for? Other than taking money out of one pocket and putting it into another with the possible result that the whole world economy will blow up?

Finally, here is a very good article from Paul Krugman and Robin Wells. Below I quote the conclusion.

Now that the multiple bubbles have burst, there’s obviously a strong case for a return to much stricter regulation. It’s by no means clear, however, whether this will actually happen. For one thing, the ideology used to justify the dismantling of regulation has proved remarkably resilient. It’s now an article of faith on the right, impervious to contrary evidence, that the crisis was caused not by private-sector excesses but by liberal politicians who forced banks to make loans to the undeserving poor. Less partisan leaders nonetheless fret over the possibility that regulation might crimp financial innovation, even though it’s very hard to find examples of such innovation that were clearly beneficial (ATMs don’t count).

Equally important, the financial industry’s political power has not gone away. Banks have waged a fierce campaign against what many expected to be an easily passed reform proposal, the creation of a new agency to protect financial consumers. Despite the steady drumbeat of scandalous revelations—most recently, the discovery that Goldman Sachs helped Greece cook its books, while Lehman cooked its own books—top financial executives continue to have ready access to the corridors of power. And as many have noted, President Obama’s chief economic and financial officials are men closely associated with Clinton-era deregulation and financial triumphalism; they may have revised their views but the continuity remains striking.

In that sense, this time really is different: while the first great global financial crisis was followed by major reforms, it’s not clear that anything comparable will happen after the second. And history tells us what will happen if those reforms don’t take place. There will be a resurgence of financial folly, which always flourishes given a chance. And the consequence of that folly will be more and quite possibly worse crises in the years to come.

Addendum: My use of the term "derivative" here is too simple. A derivative is an instrument whose value depends on a different underlying asset. Futures and options are perfectly good and helpful derivatives. Credit default swaps? Collateralized debt obligations?