The beginning of the end of meaningful regulatory reform

By Felix Salmon
September 23, 2009
begun in earnest:


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The erosion of the Obama administration’s regulatory-reform plans has now begun in earnest:

At a hearing before the House Financial Services Committee, Treasury Secretary Timothy F. Geithner announced that the administration had dropped one provision in its plan for a consumer financial protection agency — a requirement for banks and other financial services companies to offer “plain vanilla” products, like 30-year fixed mortgages and low-interest, low-fee credit cards.

There’s no good reason for this capitulation, except for the financial lobby has so effectively captured Congress that no reform would be able to get through with such a common-sense provision in place. This has nothing to do with the government “approving and disapproving a wide array of financial products”, it just says that anybody who wants to call themselves a bank should provide simple, basic banking products which aren’t prone to hidden fees and lucrative opacity. I fear that by the time Congress is done, the Consumer Financial Protection Agency won’t be able to protect consumers at all — and that’s assuming it’ll even exist.

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From DealBook:

“Mr. Geithner said those institutions whose problems could shake the financial system will face far greater regulatory scrutiny and higher capital standards. But under questioning from Representative Spencer Bachus of Alabama, the ranking Republican on the committee, he refused to rule out the possibility of future bailouts of big companies.

“You can’t have a system, how shall I say it, where you abolish the fire station, or lock the doors to the fire station,” Mr. Geithner said. “That’s not a system that works.”

This is the truth. The only difference from Bagehot’s point about the realities of having a LOLR is that, today, the LOLR will lend against crap assets. The only real solution is Narrow/Limited Banking plus a tax on size or size limit. It won’t be perfect, but it’s better than what we have now.

This reminds me of the concept of The New Normal, which means govt interjected into the economy, supposedly. As opposed to what? We had a system of deregulation guaranteed by the assets of the American people. That’s what we still have and will have. Given that the banking regulations are already being eased, can anyone imagine them getting tougher when the economy improves? If that’s the system, it would be far better to announce that we guarantee everything up front, since the bankers already believe it and act upon it, as do investors. What’s the point of hiding the truth?

The New Normal= Take it easy for a while until everybody forgets what happened. Play along a bit. It will be worth it in the end. Most of all, say the right things in public.

Now, I’m certain that these people don’t want a repeat of what occurred. But the problem is that they cannot bring themselves to accept the restrictions that we need. It’s the same overconfidence. We can’t seem to accept that we’re not that smart.

Oh but we are that smart, Don. You see, regulation only ever serves to enhance the position (or appear to oppose) those who would benefit the most from such a ‘crisis’, or create an uneven playing field thereby rigging the game. When the gatekeepers are the thieves, regulation really loses its meaning.

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