Congress is considering a package of financial industry reforms that will be debated at length in the months ahead. It seems fair to say that there is sharp disagreement over many provisions.
Yet no one can claim that the financial system has functioned well in the last two years. Reform is essential to lessen the risk that financial firms, hedge funds and brokers will once again steer our economy into trouble.
The House version passed last week 223-202, with a number of Democrats, and all Republicans, opposed. Opponents were appalled by the bill’s broad reach ”“ they said it might stifle financial market innovation.
Financial innovation? That’s a concept consumers and investors have learned to beware. Excessive risk-taking, abetted by the use of financial derivatives like mortgage-backed securities and credit default swaps, was a primary factor in the near-collapse of worldwide credit markets in 2008.
Yet derivatives are much more than an opportunity for hedge fund managers to place exotic bets. They provide pricing stability that is essential for farmers and many industries, and allow banks, corporations and investors to hedge a variety of financial risks.
The question for government is to what extent these markets must be regulated. The House bill seeks to force most derivative trading onto regulated exchanges, though allowing some exceptions for commodity-based businesses.
It is a promising effort to gain a measure of control over these potentially dangerous but very useful financial tools.
The bill also envisions closer oversight over financial firms considered too big to fail, and give the government the power to break up companies that threaten the economy.
It strikes many as a step too far toward government control of the economy, but as the president said last week, we should never again face the choice of bailing out bankers or letting the whole economy collapse.
The bill also promises to provide a missing layer of oversight by creating a Consumer Finance Protection Agency. Consumers must now rely on bank regulators to protect their rights, but the new agency would take over review of all consumer finance, including mortgages, credit cards, payday loans and terms on savings accounts.
Establishing and operating such an agency would be expensive, but bringing fairness and coherence to these difficult markets might be worth it.
— Questions? Comments? Contact Managing Editor Nick Cowenhoven at nickc@journaltribune.com or City Editor Kristen Schulze Muszynski at kristenm@journaltribune.com.
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