Regulation vs. Structural Change

From the Baseline Scenario:

By James Kwak

Robert Reich discusses a theme that I think I’ve discussed before (and first heard expressed by Ezra Klein):

“The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street.”

Reich’s post weirdly cuts off in the middle on his site, but Mark Thoma has a longer excerpt. In that excerpt, Reich concludes this way:

“The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure. That was the approach taken to finance by Franklin D. Roosevelt in the 1930s, and by Lyndon Johnson to health care (Medicare) in the 1960s.

“So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama did not want to take them on directly.”

I would add that Obama is also a political pragmatist with a strong belief that getting something done is better than nothing. I think that on health care he and the administration probably did the best they could. Remember, they barely got a majority in the House, then barely got sixty votes in the Senate, then barely got a majority in the House again (to pass the revised bill), and public opinion was very divided.

But on financial reform I think they could have gotten more done. First of all, public opinion wanted more; and second, the administration lobbied against some of the most far-reaching changes, such as Kaufman-Brown and Blanche Lincoln’s derivatives spinout provision, and Merkley-Levin never got a vote. The whole theater of the administration trying to put the bill into stone before it got much stronger should have been embarrassing to them, but they decided they could take the hit.

I think the explanation for this is some combination of (a) the economic policy guys really think that the financial system we have today is basically fine and just needs a little better oversight and (b) Obama just doesn’t care that much and wants to save his political capital (and his support from the financial sector) for other issues, like (hopefully) jobs and climate change.

Here’s Thoma’s conclusion:

“Structural change is harder than imposing new regulations. The fact that legislators are shying away from the harder to impose types of change out of fear of losing reelection support from the financial industry points to the political power the industry still has, and to the need for structural change to reduce this political (and economic) power. If we cannot muster the political will to make such changes in light of the most devastating financial collapse since the Great Depression, that does not bode well for the future.”