How to make financial reforms work
The financial regulatory bill that President Barack Obama signed Wednesday recalls the old joke about a camel being a horse designed by a committee — it’ll probably move, but it’s a trick to ride, and it’s a lot uglier than it needed to be.
The committee that designed this camel was heavily influenced by the camel industry. So the Restoring American Financial Stability Act of 2010 generally leaves the balance of power over American economic security in private hands.
Given the money spent — in the hundreds of millions — by the financial services industry on lobbying and campaign contributions, the surprise is that the bill is as strong as it is.
It places authority for regulators to wind down failing financial institutions as well as other firms that pose a systemic risk to the economy.
It gives regulators some control over the trading of complex financial instruments known as derivatives.
It allows regulators to impose capital requirements on financial institutions that operate too far on the margin.
It creates a Financial Stability Oversight Council, housed at the Federal Reserve, to oversee the entire financial system. Institutions that get “too big to fail” can be broken up.
Two major failures must be addressed. The bill does not crack down on the credit ratings agencies that blithely signed off on many worthless financial products. And the obligations of Fannie Mae and Freddie Mac, the federally chartered mortgage companies that played a key role in the mortgage crisis, must be resolved.
In short, the bill may useful only insofar as strong regulators can summon the guts to challenge powerful financial interests and their enablers in Congress.
Which brings us to the immediate issue. One of the bill’s signal successes is the creation of the Bureau of Consumer Financial Protection. It will have regulatory authority over credit cards, mortgages, payday loans and other financial products that many Americans encounter every day.
Given strong and aggressive leadership, the new bureau could give American consumers an ally against predatory lenders, mortgage fraud, opaque and misleading loans — even bank fees. Naturally, the consumer financial industry doesn’t want someone tough watching over the sandbox.
Obama’s best choice to head that bureau would be the woman whose idea it was: Harvard professor Elizabeth Warren. For the last 18 months, she has been heading the Congressional Oversight Panel for the Troubled Asset Relief Program and speaking more economic sense than anyone else in Washington.
“If you don’t talk about families,” she told the Boston Globe last year, “then it’s easy to disembody subprime mortgages and asset securitization and unemployment rates without remembering that every one of those numbers is a million families.”
The industry has its knives out for Ms. Warren, who speaks truth to power in ways that make Washington insiders cringe. Sen. Christopher Dodd, D-Conn., the Senate sponsor of the financial regulatory bill, on Monday raised doubts that Warren could be confirmed by the Senate if Obama appointed her to the job.
The new law allows her to be appointed until 2011 by recess appointment without Senate confirmation.
Obama should do so immediately. If the strength of the financial regulatory bill lies in the willingness of regulators to regulate, her appointment would be a powerful signal of hope and change.