2008 All Over Again? from MOJO 2APR10

I've been feeling pretty down lately. Bank regulation is why.

Or, more accurately: the lack of bank regulation. Or, even more accurately: the increasing certainty that Congress isn't going to do anything serious to rein in the behavior that caused the great financial meltdown of 2008.

That disaster had several causes, but three of them were fundamental. First: The financial sector was far too leveraged, making it catastrophically vulnerable to even small market losses. Second: Financial firms had become far too dependent on overnight "repo" loans from the shadow banking sector, a source of funding that has to be rolled over daily. At the first sign of trouble, their repo lenders rushed for the exits—a modern-day run on the bank—and the banks risked collapse. Third: The astronomical growth of unregulated credit derivatives spread risk throughout the financial system in ways that were, literally, too complex for anyone to understand. So when banks started to fail, it was impossible to know who was still solvent and who wasn't. The result was a wholesale freezing of the entire financial system as investors rushed to pull their money out of everywhere.

So those are the big problems. But look at what's in the pipeline from Congress. First, a Consumer Finance Protection Agency that would regulate things like credit cards and home loans. It's a good idea, but it's not central to what caused the crash. Second, resolution authority so that the government has the legal authority wind up big banks that are insolvent. It's also a good idea, but it's not something that helps prevent banks from failing. Third, streamlined bank supervision. This is another good idea, but—well, you get the idea. It's not central to keeping the financial system safe.

So what about our three fundamental problems? Well, Treasury Secretary Tim Geithner has made it clear that he doesn't really want Congress to set leverage limits, leaving that instead to international negotiations and regulator discretion. There's nothing much in either the House or Senate financial reform bills about the stability or tenor of bank financing. And derivative regulation has been successively watered down to the point that almost nothing is left.

And this is even before the serious lobbying starts, which means that the weak rules that have been proposed so far are just going to get weaker. At best, we're going to end up with feeble regulations that, even if they were stronger, only play around the edges of the problem anyway.

Wall Street, of course, is perfectly happy with this. They've convinced themselves they weren't responsible for the Great Crash in the first place, and a bunch of new rules would seriously eat into their ability to make money and pay lavish bonuses for work that—if we're frank—has almost no social value at all. The work that does have social value, you see—making business loans, underwriting bonds, that sort of thing—just isn't all that profitable.

In a different world I might not care so much about all this. It would be galling that these guys make so much money, but that's about it. Unfortunately, in the world we actually live in, if their behavior isn't changed we're going to have another 2008 before long. And then another. And another. That I care about. It's time for all of us to start getting a little angrier about the fact that Congress isn't serious about doing anything about it.