| Financial Reform: The Good, The Bad, and The Ugly |
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| Wednesday, 01 September 2010 03:33 | |
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The long anticipated and hotly disputed Dodd-Frank Wall Street Reform and Consumer Protection Action is finally a reality. Yet the dispute continues. First the good news: The bill will set up the new Financial Stability Oversight Council, a group of regulators that are supposed to focus a watchful eye on Wall Street and tether the risk takers and deal makers to a shorter leash. The new bill also establishes tighter restrictions to protect consumers from fraud, or in the very least, it will force Wall Street to drop a few hints in not-so-fine print, reminding us to be more vigilant about what they're up to. It also proposes to force all those exotic derivatives out of the shadows and drive them onto exchanges where the structures will be more transparent, and maybe even understood. Sounds good, but will putting all of this into action just create more problems? Some critics think a lot will depend on how the regulators interpret the rules, and there appears to be ample leeway for that interpretation. Critics want to know: Will the new regulations just increase the size of the government? Is it going to restrict credit at a time of economic hardship? Will it mean costly rules for business owners? Who does it really protect? Those questions are still TBA. Maybe the weakest part of the bill is that it does nothing to reform the housing finance system, which is where this whole ugly mess began. New legislation might help eliminate the shadow banking system and correct the deficiencies in the securities rating system, but there is no mention of Fannie Mae and Freddie Mac. And we have to wonder how effective the new oversight council will be. Could the current meltdown have been avoided if a similar risk-monitoring group had already been in place? We're not convinced it could have, not when we consider how the unraveling of the economy really began. When the Feds set dramatically low interest rates, which led to cheap money, followed by the reckless stampede into the housing market, it gave rise to the bubble, and finally, the inevitable collapse. So, how is a systematic risk council going to prevent this in the future? By making the Federal Reserve raise interest rates? We don't think so. And neither does Fed Chairman Bernanke, judging from his comments at last week's annual Fed policy symposium where he made it clear that the Fed could not simply conjure up a recovery by manipulating interest rates and the money supply. We've felt all along, that a lot of our financial problems could have been avoided had the general populace really understood the difference between investing and speculating. In fact, that's such an important topic, we wrote a whole book about it.The Big Gamble: Are You Investing or Speculating? is filled with cautionary tales, along with actual historical accounts of what can, did, and will continue to happen when people are swept along by herd mentality (the housing bubble). The book is filled with the sad, but documented reality that we are never investing; we are always speculating. The success or failure of the new legislation is unpredictable at this point. The rules are not expected to be fully enacted until 2015—an eternity in today's hyper-speed financial markets. There are a lot of details to be sorted out, and, as they say, "the devil is in the details." |
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