Paul Krugman:Making Financial Reform Fool-Resistant

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http://www.nytimes.com/2010/04/05/opinion/05krugman.html?hp

The White House is confident that a financial regulatory reform bill will soon pass the Senate. I’m not so sure, given the opposition of Republican leaders to any real reform. But in any case, how good is the legislation on the table, the bill put together by Senator Chris Dodd of Connecticut?

Not good enough. It’s a good-faith effort to do what needs to be done, but it would create a system highly dependent on the wisdom and good intentions of government officials. And as the history of the last decade demonstrates, trusting in the quality of officials can be dangerous to the economy’s health.

Now, it’s impossible to devise a truly foolproof regulatory regime — anyone who believes otherwise is underestimating the power of foolishness. But you can try to create a system that’s relatively fool-resistant. Unfortunately, the Dodd bill doesn’t do that.

As I argued in my last column, while the problem of “too big to fail” has gotten most of the attention — and while big banks deserve all the opprobrium they’re getting — the core problem with our financial system isn’t the size of the largest financial institutions. It is, instead, the fact that the current system doesn’t limit risky behavior by “shadow banks,” institutions — like Lehman Brothers — that carry out banking functions, that are perfectly capable of creating a banking crisis, but, because they issue debt rather than taking deposits, face minimal oversight.

(snip)
So what the legislation needs are explicit rules, rules that would force action even by regulators who don’t especially want to do their jobs. There should, for example, be a preset maximum level of allowable leverage — the financial reform that has already passed the House sets this at 15 to 1, and the Senate should follow suit. There should be hard rules determining when regulators have to seize a troubled financial firm. There should be no-exception rules requiring that complex financial derivatives be traded transparently. And so on.

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1. Heres an article that Krugman wont talk about

http://www.deepcapture.com/manipulating-gold-and-silver-a-criminal-naked-short-position-that-could-wreck-the-economy/

[Bolo Boffin]

2. Hard to speak when you're laughing that hard. n/t

[Enthusiast]

4. Bolo Boffin, could you please clarify

the meaning of your remark?

[izquierdista]

3. The old system was fool-resistant

Glass-Steagall worked until the biggest fool around, Phil Gramm, arrived to take it on. He was SO pig-headed, and SO stupid, that even a successful track record couldn't keep him from throwing a monkey wrench into the works. And to cap off his stupidity, he actually got Bill Clinton to put his autograph to it.

[Enthusiast]

5. Wasn't Gramm's wife on

the board of Enron during the debacle?

It appears to me we are suffering the results of the enronization of our financial system.