Lots of chatter about Sen. Chris Dodd’s financial reform bill floating around the blogosphere this week. Here’s a look at what three academics have to say about the issue.
- Proposed financial reform legislation is missing one big aspect: effective reform for ratings agencies, University of Oregon economics professor Mark Thoma writes. In particular, “the incentive to provide high ratings to encourage future business,” he says. True, part of the legislation is directed at the ratings agencies. “But it doesn’t get at the main problem, which is the incentive to tell its customers what they want to hear, i.e. the incentive to deliver higher ratings than deserved,” Thoma says. “For some reason ($$$???), the ratings agencies seem to be escaping the legislative and regulatory attention they ought to be receiving.”
- The bill is a “very modest step” in right direction, but it’s missing three key aspects to help prevent another Wall Street meltdown, writes former labor secretary and UC Berkeley economics professor Robert Reich. He says trading of all derivatives should be required on open exchanges, Glass-Steagall should be re-instituted in its entirety, separating commercial banks from investment banks and big banks should be capped at $100B in assets. “Wall Street doesn’t want these three major reforms because they’d cut deeply into profits, and it’s using its formidable lobbying clout with both parties to prevent these reforms from even from surfacing,” Reich says.
- The proposed bill misses one main thing: “the idea of a better, more intelligent and more accountable Congress,” writes George Mason economics professor Tyler Cowan. “The upshot is that bank regulation is a tough slog: it depends on the quality of the bureaucracy and the periodic attention of a somewhat responsible Legislature,” he says. “It is like a chess game whereby the private sector eventually finds a way around most of the binding regulations.” Too much attention is being placed on the new regulations, he adds. But “it’s the daily reality of regulation that matters and right now the US Congress simply isn’t up to the job.”