Financial Reform Bill: A Crisis Wasted

by: Alex Cook

Memo to Washington: slapping the title “financial reform” on a piece of legislation doesn’t actually mean that the bill is going to reform the system. This bill fixes some legitimate minor problems, changes some things that weren’t problems in the first place—and ultimately doesn’t address the root causes of the 2008 crisis. It’s a shame, since this was a rare opportunity to create real positive change in the financial system.

For one, I reject the hype that this is the “biggest overhaul since the Great Depression.” Is it really bigger than the Sarbanes-Oxley Act of 2002, which drastically increased the standards that companies are held to for financial reporting? This new bill is certainly bigger in terms of page count, but I doubt the impact on preventing financial shenanigans will be significant.

I also completely reject the idea that a weak bill is better than no bill at all. Passing a poorly-written bill will make true financial reform a low priority. A poorly-written bill creates burdens for legitimate businesses but does not address the core problems.

Root causes

As I wrote previously, the root causes of the crisis can be broken down into three elements: over-stimulation by the Fed after the tech bubble burst, reckless mortgage brokers, and credit ratings agencies failing to do their job.

Incompetence on the part of credit ratings agencies cannot be legislated away. The Federal Reserve, however, did need to be addressed in a financial reform bill. A better model, in my opinion, would be more of how the ECB operates, where the main impetus is price control, and price control only. Currently, the Fed is preoccupied with price levels, GDP, unemployment, and other metrics. The result is that the Fed can feel more trigger-happy on quantitative easing than it healthily should.

The bill does address some important concerns, such as derivative transparency. However, many of the infamous derivates and structured products wouldn’t have been possible to be issued in the first place if it wasn’t for overabundant credit created by the Fed after the tech bubble.

In short, this bill treats symptoms and not causes.

What the bill does well if it works as intended

In all fairness, encouraging transparency in the derivatives market is very important, but it remains to be seen how effective this bill will be at that. Also, a consumer protection agency may be a good idea, but does this really do anything that the FTC and other agencies do not do currently? It will be a positive if it results in streamlining bureaucracy, but again, that remains to be seen.


Some of the things that this bill addresses include overdraft protection fees and other trivial concerns. These were symptoms, not causes.

If Washington considers their financial reform mission to be accomplished with this bill, remember that those who fail to learn from history are doomed to repeat it.

Disclosure: No positions