NY Times reports on shortcomings in Financial Reform Bill

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Monday May 03, 2010 · 2:11 AM PDT

2010/05/03 · 02:11

As the Senate is about to start debate on the long anticipated Financial Reform Bill the New York Times is reporting on shortcomings that remain in the Bill that could leave the financial system vulnerable to a future crisis that could result in another disastrous disruption of the larger economy.

Senate Financial Bill Misguided, Some Academics Say

Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market

The Dodd Bill leaves capital markets to their own devices.

A diverse group of critics, however, say the legislation focuses on the precipitators of the recent crisis, like abusive mortgage lending, rather than the mechanisms by which the crisis spread.

Gary B. Gorton, a finance professor at Yale, said the financial system would remain vulnerable to panics because the legislation would not improve the reliability of the markets where lenders get money, by issuing short-term debt called commercial paper or loans called repurchase agreements or "repos.".

Should we build the foundation of a new financial regulatory structure on the free market sand of potentially chaotic capital markets?

The government plans to require lenders to hold larger reserves against unexpected losses and to require that they keep money on hand to meet short-term needs.

David A. Skeel Jr., a corporate law professor at the University of Pennsylvania, said it would be a mistake for Congress to leave the drafting of these standards to the discretion of regulators.

"Regulators working right now will be tough," Professor Skeel said. "But we know from history that as soon as this legislative moment passes, the ball is going to shift back into Wall Street’s court. As soon as the crisis passes, what inevitably happens is that the people that are paying the most attention are the banks."

This sort of Stockholm Syndrome among regulators that become captives of the industries they regulate is a pattern that we've seen replicated across a wide variety of government departments and agencies. We need look no further than the current unemployment rate, or the disaster in the Gulf Of Mexico to see how these too cozy relationships can impose huge costs on the country.

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