Financial Crisis and Financial Reform

Here's the opening bit from an excellent article by David Leonhardt in the NY Times discussing the need for financial regulation and the state of reform:

A public good is something that the free market tends not to provide on its own, to the detriment of society. Pollution laws and police departments are classic examples. In the case of finance — and of the crisis of the past two years — this missing good has been strong regulation. A weak system of regulation allowed Wall Street firms to take on enormous debt. Those debts let the firms make more and riskier investments than they otherwise could have, lifting their profits. But when the value of the investments began falling, the firms had little margin for error. They were like home buyers who made a tiny down payment and soon found themselves underwater.

It was tempting to let the banks fail. They certainly deserved it. But big bank failures often cause terrible damage. Credit dries up, and the economy can enter a vicious cycle of falling asset prices and job losses. That is what began to happen in 2008. To get credit flowing again, the federal government came to the rescue with billions of taxpayer dollars. It was a maddening story line: the government helped the banks get rich by looking the other way during good times and saved them from collapse during bad times. Just as an oil company can profit from pollution, Wall Street profited from weak regulation, at the expense of society.

If there has been a theme to the Obama administration’s disparate domestic policies, it has been to invest more in public goods.

You can watch a Bill Moyers interview with Gretchen Morgenson the NY Times business columnist. She is very pessimistic about financial reform because (a) it has been two years and nothing has been done and (b) Obama has put the fox in the hen house to "watch" the chickens.

Here's a bit from an article by Bill Moyers on Huffington Post:

That wickedly satirical Ambrose Bierce described politics as "the conduct of public affairs for private advantage."

Bierce vanished to Mexico nearly a hundred years ago -- to the relief of the American political class of his day, one assumes -- but in an eerie way he was forecasting America's political culture today. It seems like most efforts to reform a system that's gone awry -- to clean house and make a fresh start -- end up benefiting the very people who wrecked it in the first place.

Which is why Bierce, in his classic little book, The Devil's Dictionary, defined reform as "a thing that mostly satisfies reformers opposed to reformation."