For those with 20 minutes to spare, and a need to catch up quick on financial regulation, we recommend reading David Leonhardt’s big NYT Magazine piece (via Calculated Risk), which provides a nice, generalized overview of what the Dodd bill hopes to accomplish.
Leonhardt comes off a strong advocate of reform, who also happens to be realistic and aware of how every goal could ultimately flop, and how many of the proposed ideas don’t even get at the root of the problem.
(For example, on the benefits of limiting the size of firms: “Canada has 4 of the 50 biggest banks in the world. The United States, with an economy 10 times as large as Canada’s, has 5 of the top 50.” And yet, of course, Canada was largely unscathed by the crisis.)
But what’s interesting is his final conclusion.
Even if we can’t prevent the next financial crisis, we can make it poorer:
The obvious reason to re-regulate finance is to prevent the next crisis or at least to make it less damaging. But there are other potential benefits to reform. Consider what has happened to the American economy over the last three decades. Highly leveraged financial firms became a dominant part of the economy. Their profits allowed the firms to recruit many of the country’s most sought-after employees — mathematicians, scientists, top college graduates and top former government officials. Yet many of those profits turned out to be ephemeral. So some of the best minds were devoted to devising ever-more-complex means of creating money out of thin air, the proceeds of which then drew in even more talent.
A more serious approach to regulation could, if indirectly, have a big impact on this situation. By reducing financial firms’ profits, it could reduce the industry to a smaller and arguably more natural size. Re-regulation could remove some of the subsidies that Wall Street now receives. The cottage industry of hidden fees, ballooning interest rates and other misleading practices could be brought under control. Higher capital requirements and a bank tax could force financial firms to experience the bad times as well as the good. Above all, re-regulation could acknowledge that modern finance brings both benefits and risks.
It is worth remembering that Wall Street’s long boom has not exactly been shared by much of the rest of the American economy. Wage growth for most workers has been painfully slow over the past three decades. Economic growth over the last decade was slower than in any decade since World War II. Surely, one goal of re-regulation should be to loosen Wall Street’s grip on the country’s resources, both financial and human, in the hope that they might be put to more productive use.
This sounds right to us. If a post-Dodd Wall Street were truly less complex (and so far we’re not convinced, but with a strong Volcker Rule it’s possible) there would be less of a need for high-paid brains that specialised in either creating or untangling the complexity. Perhaps a good thing.