The Atlantic's Joshua Green writes a post downplaying financial reform. His primary anger is with laudatory coverage of Congress' work on the bill, which he feels was motivated more by politics than principle (surprise!), but in the process he criticizes the legislation in ways that suggest he's not very familiar with it. His case against the legislation is simple: It isn't as big a deal as the New Deal. He writes,
[W]hatever Obama signs into law will be modest given the scope and severity of the crisis, nothing like the New Deal reforms. No bank will be broken up, no government agency punished, no Wall Street executive denied his bonus.
Ironically, enough for someone complaining about the politicization of reform, his policy critique is that members of Congress didn't adopt enough politically popular populist gestures.
Let's start with breaking up the banks. This is a legitimate critique of the bill, but not for the reason Green suggests. Oh wait, he doesn't suggest any reasons. In any case, the Kaufman-Brown amendment to cap the size of the largest banks and breaking up the largest ones was a good idea, but it would have essentially returned the financial sector to the late 1990s without changing the way that banks do business. (You can argue that a liabilities cap would create incentives for lending, but I haven't seen a ton of research on the topic.) Especially since size was not a primary cause of the crisis but rather an exacerbating factor, it's hard for me to take the bank cap seriously as a fundamental rethinking of banking.
Next he says, "No government agency punished." This is pure hand-waving. I'm curious to learn why punishing an agency would help prevent future crises. In any case, Green apparently missed that the most lax regulator, the Office of Thrift Supervision, is eliminated in both bills, or that the Fed had its consumer-protection authorities stripped away because it failed to use them. In fact, the creation of a new Consumer Financial Protection Agency is a New Deal-level accomplishment. And, of course, the worst regulators in the crisis have already been fired, with the exception of John Dugan, who will be replaced this summer, and Ben Bernanke, whose renomination is indeed inexplicable -- but that is on Obama's head, not Congress'.
Finally, "no Wall Street executive denied his bonus." Again, how would that help the country in the future? Apparently, Green missed reports that the reform bill will cut Wall Street profits by 20 percent, and, as new rules come into affect to limit risk, likely even more. Perhaps he's angry about Wall Street profiting off government subsidies, but the fact that the banks paid back what they've borrowed, and will be taxed further to cover the entire cost of the bailouts, has escaped him. The bill also increases shareholders' and regulators' power to constrain compensation, but maybe he didn't read that section.
Green can't seem to cite anything that he would consider an actual reform other than breaking up the banks and two provisions already in the bill -- the Volcker rule and the derivatives desk ban at the largest banks. The latter will be strengthened in conference with language from the Merkley-Levin amendment, the former slightly weakened, but in concert they will change the way Wall Street does business. Does Green want to bring back Glass-Steagall, as some suggest? He doesn't say. All of this isn't to say that there haven't been good ideas left on the table -- merging the SEC and CFTC, for one -- but the far reach of these reforms, including the long-delayed derivatives regulation title, make this a comprehensive and significant piece of legislation.
Green's primary complaint, though, is that politicians acted because voters were angry, not because members of Congress are the soul of integrity. This strikes me as an argument that our political system is working -- the whole point is that voters are supposed to force legislators to take action. Does he think that New Deal reforms came about because members of Congress suddenly decided that the common good demanded reform, or because record unemployment threatened to undo the social fabric of the country? While we hope our legislators are people of principle, the idea of some golden age when politics didn't matter is ahistorical at best.
If the coverage of the legislators who crafted the bill is too glowing, that's problematic, but we don't score public policy on its sincerity or on how it compares to 80-year-old legislation. We score it on whether or not it works today, and from what we know, this bill is likely to make our financial sector safer and stronger.
-- Tim Fernholz
