Today, President Obama spoke at Federal Hall in New York “to try to breathe new life into efforts to overhaul the financial regulatory system.” One year after the collapse of Lehman Brothers revealed the true extent of Wall Street’s meltdown, the regulatory reform effort has bogged down on Capitol Hill (though both House Financial Services Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Chris Dodd (D-CT) seem intent on beginning to move legislation).
As the Washington Post noted, “while the health-care debate has raged nationwide throughout the summer, financial reform virtually vanished from the public radar, even as an army of lobbyists worked on Capitol Hill to reshape the president’s agenda.” And as Wall Street has started to rake in profits again, the urgency to reform the system has faded. In fact, CNBC’s Melissa Lee wondered today if the case for regulatory reform can even be made “when we have recovered without it”:
It is business as usual on Wall Street, and Wall Street has recovered and adopted a lot of their own sort of standards these days. For instance, not many CEO’s on Wall Street say 30-1 leverage is a good idea any more. 15-1 is more the way they like it these days, as John Mack told our own Maria Bartiromo over the weekend. So therefore, is there a need, is there a case for regulation when we have recovered without it?
As we’ve seen with an increasing unemployment and mounting mortgage troubles, Wall Street profits don’t in any way mean that “we have recovered,” if “we” is inclusive of anything other than Wall Street banks. And even Wall Street’s profits are mostly the result of government guarantees, bookkeeping tricks, and relaxed accounting standards.
While Lee seems content to trust that the banks have learned their lesson and will regulate themselves appropriately, as the New York Times pointed out, “the biggest banks have restructured only around the edges”:
Only a handful of big hedge funds have closed. Pay is already returning to precrash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year. Nor are major pay cuts likely, according to a report last week from J.P. Morgan Securities. Executives at most big banks have kept their jobs…For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos.
Plus, as Nobel Prize-winning economist Joseph Stiglitz pointed out, the problems inherent with having banks that are “too big to fail” are “worse than they were in 2007 before the crisis.”
In his speech, Obama said that “there are some in the financial industry who are misreading this moment…We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.” But in some ways, we are already there, and it will take a concerted effort at enacting regulatory reform over the objections of the financial industry to stop the slide back to 2007.