Financial Reform -- Just What You Wanted to Know

So, you ask, is the Dodd-Frank Wall Street Reform and Consumer Protection Act good for the country?

I ask myself that again and again.  I get frustrated by the talking heads and writers, who act as if the bill only contains 4 or 5 provisions -- a crackdown on derivatives and securities trading, no more "too big to fail" bailouts, an independent consumer watchdog, an advance warning system, and new rules on corporate governance and executive pay.  Could these measures prevent a recurrence of another financial crisis?

Maybe.  But the bill contains much more -- lots of rules for everyday banking and mortgage lending -- that might have been effective in preventing this crisis.  If lenders had followed these rules, which include some very old-fashioned concepts, such as making sure borrowers have the ability to repay their loans, I'd bet mortgage-backed securities wouldn't have collapsed over bad loans.  Changing the way mortgage brokers are paid also may help them focus on making good loans.  I think these are good changes, although the fact that they're needed is a sorry reflection on what many of us like to think of as the prerogatives of a free market.  Greed is hard to conquer.

Uncertainty reigns.  Perhaps you thought -- not long ago I did, and I went to law school -- that if Congress lays out a requirement in a statute, that's the rule to be followed.  For example, a few years ago Congress enacted some credit card changes that included specific language to explain on monthly statements the effect of making a minimum monthly payment.  The language appeared inside quotation marks and even used capital letters here and there.  I assumed that the prescribed language would eventually appear on my monthly statements.  But no, the Federal Reserve Board tweaked it after concluding it wouldn't achieve the intended effect.  Board bad?  Wrong, the statute itself permitted the Board to do just that.

The financial reform bill takes the same approach.  First, it provides that most of the rules won't take effect until the Bureau adopts regulations to implement them.  Second, it allows the new consumer watchdog (the Bureau of Consumer Financial Protection) to tweak the rules if it wants to.  So what actually happens is going to depend on who heads the Bureau.

"I guess the lobbyists who've been paid gobs of money the past six months are going on vacation," says Virginia.

"Whoa-ho," I say.  "Far from it.  Their work has just started.  Now they have several years to lobby the regulators who must implement the bill.  What they've been paid so far is chicken feed."