Alan Blinder: Five Years Later, Financial Lessons Not Learned:
It's a good time to ponder how the U.S. economy was nearly brought to ruin. But will we? Or are we already forgetting?… Years of disgraceful financial shenanigans in the 2000s, some illegal but many just immoral, brought on the Great Recession with virtually no help from any co-conspirators. Congress and President Obama reacted comparatively weakly with the Dodd-Frank Act of 2010, which certainly did not seek to remake the U.S. financial system. I am a big supporter of Dodd-Frank, despite its timidity, because laws must be graded on a curve. Sadly, even this good-though-weak law now seems to be withering on the regulatory vine. Far from being tamed, the financial beast has gotten its mojo back—and is winning. The people have forgotten—and are losing.
Here are four examples….
Mortgages and securitization: Piles of unconscionably bad mortgages--underwritten by irresponsible bankers, permitted by somnolent regulators, and passed on like hot potatoes to investors via securitization--were a major contributor to the financial crisis. One response in Dodd-Frank was a "risk retention" rule…. But there was a catch. The 5% requirement does not apply to "qualified residential mortgages"…. The law mandated that a specific rule be written within 270 days. More than 1,100 days have now passed, and the country is still waiting….
Derivatives: Disgracefully bad mortgages created a problem. But wild and woolly customized derivatives--totally unregulated due to the odious Commodity Futures Modernization Act of 2000--blew the problem up into a catastrophe…. Dodd-Frank calls for greater standardization and more exchange-trading…. Wonderful ideas. But the law exempts the vast majority of derivatives. Do you see a pattern here?… Gary Gensler… one of the few real reformers… ran into a wall of resistance from the industry, from European regulators, and from some of his American colleagues when he tried to implement even the weak Dodd-Frank provisions for derivatives….
Rating agencies: The credit-rating agencies… blessed financial junk with coveted triple-A ratings…. Dodd-Frank instructed the Government Accountability Office to study "providing incentives to credit rating agencies to improve the credit rating process" and report back within 18 months…. The GAO issued a report 18 months later, laying out a number of options; it has gathered dust ever since. And the SEC? Well, don't get me started. Amazingly, the rating agencies are still compensated as they were on the day Lehman Brothers crashed.
Proprietary trading: The Volcker rule, part of Dodd-Frank, bans proprietary trading by banks, to prevent them from gambling with FDIC-insured funds… is the law of the land here. Sort of. In practice, the rule is hortatory until detailed regulations are written and promulgated. Dodd-Frank was signed into law in July 2010. The Volcker rule has been tied up ever since by internal bureaucratic squabbles and external pressure from the banking industry.