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July 2010, Week 3

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Thu, 15 Jul 2010 23:24:07 -0400
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Reform Bill Will Improve Regulation in the Financial Sector

Statement on Wall Street Reform Bill
Center for Economic and Policy Research (CEPR) 

http://www.cepr.net/index.php/press-releases/press-releases/statement-on-wall-street-reform-bill-july-2010

For Immediate Release: July 15, 2010
Contact: Alan Barber, (202) 293-5380 x115

Washington, D.C.- Dean Baker, co-director of the Center for
Economic and Policy Research (CEPR) issued the following
statement on the passage of the financial reform bill by
Congress:

"The final bill passed by the Senate today and already
approved by the House of Representatives will improve
regulation in the financial sector. However, given the
severity of the economic crisis caused by past regulatory
failures, the public had the right to expect much more
extensive reform.

"On the positive side, the creation of a strong independent
Consumer Financial Protection Bureau stands out as an
important accomplishment. Such an agency would have
prevented some of the worst lending practices that
contributed to the housing bubble. It will be important that
President Obama choose a strong and effective person, such
as Elizabeth Warren, as the first head of the Bureau to
establish its independence.

"The requirement that most derivatives be either exchange-
traded or passed through clearinghouses is also an important
improvement in regulation. However, important exceptions
remain, which the industry will no doubt exploit to their
limit.

"The creation of resolution authority for large non-bank
financial institutions is also a positive step, although the
fact that no pre-funding mechanism was put in place is a
serious problem. Also, the audit of the Federal Reserve's
special lending facilities, as well as the ongoing audits of
its open market operations and discount window loans, is a
big step towards increased Fed openness.

"On the negative side, there is little in this legislation
that will fundamentally change the way that Wall Street does
business. The rules on derivative trading will still allow
the bulk of derivatives to be traded directly out of banks
rather than separately capitalized divisions of the holding
company. The Volcker rule was substantially weakened by a
provision that will still allow banks to risk substantial
sums in proprietary trading.

"More importantly, there is probably no economist who
believes that this bill will end the risks of too-big-to-
fail financial institutions. The six largest banks will
still enjoy the enormous implicit subsidy that results from
the expectation that the federal government will bail them
out in the event of a crisis.

"Also, the fact that no regulators, most obviously Ben
Bernanke at the Fed, were fired for failing to prevent the
crisis leaves in place serious doubts about the structure of
incentives for regulators. Cracking down on reckless
behavior by politically powerful financial institutions will
always be difficult for regulators. On the other hand, if
regulators know that failing to crack down carries no
consequences, even when it leads to disastrous outcomes, we
can expect that regulators will have a strong bias toward
ignoring reckless behavior.

"It is possible that Congress may eventually take stronger
steps toward restructuring the financial sector, most
obviously in the context of a financial speculation tax.
While this was not included in the Dodd- Frank bill, in the
context of severe budget pressures, a tax that can raise
$150 billion a year in revenue may look more appealing than
most alternatives. Such a tax would do far more to
restructure the industry than this financial reform bill."

###

Center for Economic and Policy Research
1611 Connecticut Ave, NW, Suite 400
Washington, DC 20009
Phone: (202) 293-5380, Fax: (202) 588-1356

http://www.cepr.net/

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