Last week was financial regulation reform roll-out, and while the final result was a mixed bag of good ideas, bad ideas and some plain old vague ideas, there was some dark speculation from critics like Simon Johnson about whether or not bank lobbyists had written the proposal: The reform process appears to be have been captured at an early stage -- by design the lobbyists were let into the executive branch's working, so we don't even get to have a transparent debate or to hear specious arguments about why we really need big banks.I'd go right ahead and say that's unfair. For starters, Johnson links to this article that reports on the variety of people the administration spoke to about the plan, including but not limited to bank lobbyists. Although it's hard to blame Johnson, an economist, for not doing any reporting for his post, if he had bothered to talk to anyone at Treasury, he would have found out that besides meeting with representatives of the various financial sector stakeholders -- who don't have a monolithic agenda; one primary reason we don't have as much regulatory consolidation is because the well-regarded small community banks objected to it -- it also included multiple discussions with Paul Volcker and other members of the President's Economic Recovery Advisory Board, multiple discussions with staff and members of the House Financial Services Committee and the Senate Banking Committee, multiple meetings with the various regulators, and meetings with representatives from places like the Consumer Federation of America as well as a variety of academics. That's not say all stakeholders are created with equal influence or that this proposal is free of malign influence, but even if you don't buy the public statements from financial sector reps criticizing the plan, it's clear from reading it that there are sections that will limit both the risk-taking and profitability of banks. That isn't to say that Johnson's concerns about the plan aren't valid or important (here's an introduction to his world view). But getting good policy has to be about more than name-calling. For instance, the administration isn't making any arguments, specious or otherwise, that we need big banks -- they're actually taking an approach articulated by Paul Krugman. The administration has also been transparent about why they think the crisis occurred, even if that view is wrong. And though Johnson criticizes the lack of consolidation in the plan, the fact is that the elimination of the thrift charter and the consolidation of consumer regulation are going to eliminate some serious problems of regulatory arbitrage. And I can't stress enough how unhappy the financial sector is with the Consumer Financial Protection Agency, the single bona fide progressive aspect of the plan. Speaking to folks on the Hill and at Treasury about this package and why it is not as ambitious as it should be, my impression is that it's a problem of several competing interests: One, getting through a regulatory overhaul as soon as possible, since by the time this becomes law (at the soonest, early 2010) many banks will have been operating profitably under the old regime for some time, and because the closer to the crisis reform comes the more ambitious it can be. At the same time, though, there is already a lot on congress' plate, and regulatory reform that included a lot of consolidation -- and inevitable intra-committee fighting -- might have slowed down the entire agenda. My biggest worry is that the Administration still underestimates the banking industry's power on Capital Hill -- maybe one senior official I spoke with was just trying to spin me, but the official seemed confident that the banks didn't have the political pull to deeply upset the plan. That view certainly belies what we've seen before on issues like bankruptcy loan modification, and if financial regulation goes that way, we're in trouble.
-- Tim Fernholz
