Thursday, August 12, 2010

Financial Reform: True Change?

Steve Ramirez has provided an excellent assessment of the Dodd-Frank Financial Reform Bill over the past several weeks as he has gone through the legislation by section and provided terrific insight and forecast. By my reading, Professor Ramirez suggests that the new legislation is a mixed bag, with some potential for real reform and thus guarded optimism, but Ramirez remains dubious, even extremely dubious, that the bill will prevent another meltdown and laments the lost opportunity (along with Joseph Stiglitz) to transform Wall Street culture and U.S. capitalism as currently practiced.

In addition to Professor Ramirez' critical insights, I have read two additional works that I recommend as crucial for appreciating and understanding the financial market crisis and the way too tepid legislative response, in my view.

First, I just finished reading Simon Johnson and James Kwak's book "13 Bankers" which is a tour de force in connection with situating the financial market crisis and describing the thoroughly sloppy and irresponsible governmental and regulatory embrace of Wall Street's laissez faire mantra and "smartest guys in the room" culture. That Dodd-Frank did nothing to sever this relationship continues to stun and discourage. Read 13 Bankers for a complete extrapolation of the run-up to the financial market meltdown.

Then, second, I just read Matt Taibbi's recent Rolling Stone Magazine article investigating the internal operations and negotiations in getting the Dodd-Frank bill passed, called "Wall Street's Big Win." Taibbi's sometimes crude, but stark assessment of the bill and the diluting compromises literally required by Wall Street, various Senators and the Obama Administration to get it passed, simply supports Johnson and Kwak's assessment that Wall Street, Pennsylvania Avenue and Capitol Hill all share the same mindset and commitment to investment banks and Wall Street executives as "the Way." Nothing (or very little) in Dodd-Frank will curtail the dizzying excess and reckless decision making by private bank executives that took the global economy to the brink of collapse.

Both 13 Bankers and "Wall Street's Big Win" paint a devastating picture for the future economy.

Per Taibbi:

"All of this is great, but taken together, these [Dodd-Franks] reforms fail to address even a tenth of the real problem. Worse: They fail to even define what the real problem is. Over a long year of feverish lobbying and brutally intense backroom negotiations, a group of D.C. insiders fought over a single question: Just how much of the truth about the financial crisis should we share with the public? Do we admit that control over the economy in the past dec­ade was ceded to a small group of rapacious criminals who to this day are engaged in a mind-­numbing campaign of theft on a global scale? Or do we pretend that, minus a few bumps in the road that have mostly been smoothed out, the clean-hands capitalism of Adam Smith still rules the day in America? In other words, do people need to know the real version, in all its majestic whorebotchery, or can we get away with some bullshit cover story? In passing Dodd-Frank, they went with the cover story."

See "Wall Street's Big Win" here.


  1. Taibbi has written several other excellent pieces for Rolling Stone, including one that traces Goldman Sachs involvement in nearly every economic debacle the U.S. has experienced in the modern era.

  2. I strongly believe that there is always more than one side to a story and then there is the truth. On one hand, the reforms may expose and address certain issues that are deemed to be important factors that will lead to solutions. On the other hand, the reforms may not expose and address the pertinent information that would lead to solutions. This is possibly because of fear regarding how the public will react and what the public may be able to handle. I can understand both sides, but I hope that the best choice was made to ensure a much needed recovery from the financial crisis.

  3. Is it possible that the best approach to solving the financial/banking/wall street crisis is simply to let financial organizations fail when they do not operate in a manner that results in a positive return on their investment? Should the banks not be held accountable for giving mortgage loans to people who lied on mortgage applications? Perhaps the government can and should increase the criminal penalties for those in the banking realm that take risks that are beyond negligent. However, beyond that, why not let bad financial institutions fail, and the good ones absorb any business left on the table by those that can't operate properly. Do we really need more legislation right now in the financial sector? Posted by Keith.