Post Dodd-Frank: The Future of U.S. Banking and Financial Regulatory Reform

Interesting article over at Seeking Alpha from David Warsh on this topic. You can read it here, and below are my thoughts:

David,

Great article and I completely agree with you that Dodd-Frank doesn't go far enough in putting our banking regulation back on sound footing. Also, great to see SA Editors putting this topic in the Editor's Choice spotlight.

And if Soss is the next Volcker, then it would be wonderful if his name was put forward. But if he is what you say then I imagine the political timing won't work, especially given the dithering over Elizabeth Warren that we've seen of late. The Republicans might be willing to accept a Volcker-inflation slaying clone, but only if Warren (and perhaps the new Consumer Protection bureau) were sacrificed in exchange. Would that be a good trade?

A couple points I'd like to add to your article. First, comparisons of the present situation with the 1970s have become more popular of late. This is understandable given that it would appear a near-term collapse and/or depression has been averted for now. But the current bank regulatory environment *from a systemic risk perspective* still has a lot in common with the early 1930s, before sweeping financial regulation was passed, compared to the 1970s.

In the 1970s Glass Steagall and many of the sound financial and banking regulatory innovations of the 1930s were still on the books. The dismantling of depression era regulation -- which for 50 years had served the country, financial sector, and world well -- really didn't start in earnest until the 1980s after Volcker came on the scene. Also, it can be argued that the 1970s didn't have as many new, unregulated financial "innovations" as the depression era. So that's one clarification I would make to your article.

And while I appreciate the optimistic tone of your article, you do fail to mention that the 112th Congress is already taking steps to dismantle parts of Dodd-Frank. In other words, your sound and well reasoned ideas are unfortunately completely out of touch with the reality of the political situation.

I hope this Congress proves otherwise, but there is very little reason to believe that we'll see the significant and necessary financial regulatory reform of Too Big Too Fail, and the host of other problems glided over by Dodd-Frank, until the next financial crisis. The opportunity to act was in early-to-mid 2009, and the political will, for now, has been lost.

I say 'for now' because Dodd-Frank enshrined an inevitable next financial crisis. Bernanke just lit the match, and it's possible the can will be kicked down the road for another 2-4 years, perhaps longer. If history repeats (or simply rhymes), nobody will want to put the brakes on what will likely be characterized as a "still fragile" recovery for years to come.

Bottom line: there is a very high probability that the next opportunity to make meaningful financial and banking regulatory reform won't come until the inevitable next financial crisis.

More on this topic here.