Saturday, July 17, 2010

Five Problems Financial Reform Doesn’t Fix

As I mentioned yesterday, the Senate approved the historic financial reform legislation, and sent it to President Obama for a signature. Many experts are questioning the affect this bill will have on Wall Street, and earlier today I came across this interesting article from on the five problems the new legislation will not fix. Check out a snippet of the article below, or head over to for the full text.

“We would have loved to have something like this for Lehman Brothers," said Hank Paulson with a sigh, in a recent New York Times story. "There’s no doubt about it.”

Paulson was talking about the financial-regulation bill that the Senate passed today. And he’s right: the next time there’s a financial crisis, regulators will say a quick prayer of thanks to Rep. Barney Frank for giving them the power and information to quickly figure out what’s happened and how to respond. The legislation ushers derivatives out of the darkness and onto exchanges and clearinghouses, gives regulators the power to oversee shadow banks and take failing firms apart, convenes a council of superregulators to watch the megafirms that pose a risk to the full financial system, and much else.

But the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.

That is to say, many of the weaknesses and imbalances that led to the financial crisis will survive our regulatory response, and it’s important to keep that in mind. So here are five we still have to watch out for:

1. The Global Glut of Savings: “One of the leading indicators of a financial crisis is when you have a sustained surge in money flowing into the country which makes borrowing cheaper and easier,” says Harvard economist Kenneth Rogoff. Our crisis was no different: Between 1987 and 1999, our current account deficit—the measure of how much money is coming in versus going out—fluctuated between 1 and 2 percent of gross domestic product. By 2006, it had hit 6 percent.

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