Financial Reform: Progress?

written by:  andré douglas pond cummings

Late last month during an extravagant signing ceremony President Barack Obama declared that the Dodd-Frank Financial Reform Bill represented the “toughest financial reform since the ones created in the aftermath of the Great Depression.”  President Obama and Congressional leadership proclaimed that the new financial industries bill would end “too big to fail” and return fiscal responsibility to Wall Street.  “Never again” and “no more” were words thrown about with abandon in the wake of passage of Dodd-Frank.  My simple question in response is this:  Are these claims actually true?  Has Congress ended the era of “too big to fail” and does new regulation force discipline onto Wall Street executives that recklessy drove the global economy to the point of near collapse in 2008?

The short (and disappointing) answer is no.

Over on the Corporate Justice Blog, Professor Steven Ramirez has conducted a systematic examination of the Dodd-Frank bill, breaking it down by section, providing careful and insightful analysis.  Ramirez’s conclusions, by my reading, indicate that Dodd-Frank is a mixed bag, with some potential for optimism, but significant reason for pessimism.  Per Ramirez, the core of the bill abdicates legislative  responsibility to corralling Wall Street excess and fails to protect against future capital market crises.  Most disappointing is the bill’s failure to properly eradicate  “too big to fail” and regulate Wall Street’s beloved ability to create profits out of nothing but invention of new financial products (derivatives trading, credit default swaps, etc.).  Nobel winning economist Joseph Stiglitz predicts that not only does Dodd-Frank not protect against future crises, but that another meltdown is inevitable.

Simon Johnson and James Kwak in “13 Bankers,” published before passage of Dodd-Frank, describe the run-up to the financial market crisis and provide a recipe for successful regulation of the financial sector.  In clearly articulating that both Democrats and Republicans over the past two decades have adopted, if not sloppily embraced, Wall Street dogma and culture (i.e., the smartest guys in the room; Wall Street, investment banks and financial innovation as the backbone of the American economy), Johnson and Kwak report that laissez faire capitalism and thoroughly unregulated banking is a fairly new invention of Wall Street executives and Washington, D.C. leadership.  Suffice it to say, that next to nothing that Johnson and Kwak prescribe as necessary for avoiding a future financial meltdown is accomplished by Dodd-Frank.

Matt Taibbi in Rolling Stone Magazine’s “Wall Street’s Big Win,” describes in painful detail the life and death of the Volcker Rule that was supposed to divorce proprietary trading and hedge fund investing from traditional banking activity conducted by investment and commercial banking entities.  Essentially, the Volcker Rule envisioned investment and commercial banks being prohibited from using customer deposits and traditional lending income from being used for speculative trading and profiteering on a bank’s own account.  What was supposed to be a prized Obama Administration piece of the Dodd-Frank bill, the Volcker rule was diluted and watered down, after surviving numerous attempts to kill it, and was eventually riddled with exceptions (proposed by Geithner, Schumer, Dodd, etc.) that make it nearly unrecognizable.  Taibbi describes the journey the Volcker Rule experienced to arrive at its neutered state.

Taibbi’s assessment of the Dodd-Frank end product:

“But Dodd-Frank was neither an FDR-style, paradigm-shifting reform, nor a historic assault on free enterprise. What it was, ultimately, was a cop-out, a Band-Aid on a severed artery. If it marks the end of anything at all, it represents the end of the best opportunity we had to do something real about the criminal hijacking of America’s financial-services industry. During the yearlong legislative battle that forged this bill, Congress took a long, hard look at the shape of the modern American economy – and then decided that it didn’t have the stones to wipe out our country’s one ­dependably thriving profit center: theft.”

Dodd-Frank represents a failure – a missed opportunity.  Given the chance to truly interrogate capitalism as currently practiced in the United States, and to reform and make it better, the truth is, we failed.