Nearly two years after the global financial crisis erupted, the world has still not seen a definitive policy response to the major source of the problem: the implicit and explicit protections that governments give large financial institutions against collapse. In the country where it all began in earnest – the United States – lawmakers are touting “comprehensive” reform of the financial sector. The Dodd-Frank bill, as it is known, runs well past 2,000 pages and purports to lead the way in fixing the financial sector. Don’t believe the hype.
The proposed legislation preoccupies itself with the hyper-regulation of entities with far less connection to the crisis than the government-backed mortgage giants, which the proposal doesn’t touch, and with the creation of yet another regulatory agency with responsibility for transactions (such as payday loans) that had nothing to do with the mess we are in. While the proposal does offer some limits on possible bank rescues, it also creates new opportunities for even larger bailouts in the future.
The UK government’s 2010 budget bandies about ideas such as bank levies and bonus limits, which have a certain popular appeal but ultimately step around the core problems. Let’s hope the recently-formed Vickers Commission will more seriously focus on the ways in which we built a system in which risky behaviour was somehow less risky for bankers than it is for the rest of us ordinary people.