For liberals, financial reform represents regulation that could help prevent future market failures. For conservatives, it is just another example of government intervening where it shouldn't. These central philosophies on what government should or should not do are at the root of every talking point, and every debate. What is being lost from the discussion, however, is whether or not financial reform will be effective, and whether or not the benefits outweigh the costs. While separating policy analysis from ideology is not easy, it must be done in order to evaluate any divisive issue.
First, we must consider what the current problem is, and what the subsequent goals of financial regulation are. Based on what both scholars and politicians are saying, the problem with the status quo is twofold. First, large corporations are "too big to fail," and partake in risky behavior that endangers the financial well being of all of us. Second, the current structure leaves room for more potential bailouts, which cost the government, and taxpayers, a great deal of money. Thus, the goals of financial regulation are to protect consumers, reform the derivatives market, and prevent future bailouts.
On the first count, consumer finance protection, the Senate Bill seems to be effective. With the creation of the "Bureau of Consumer Finance Protection," the financial reform bill assists consumers in two ways. It plugs the structural gap in the current financial market, which monitors banks but fails to protect consumers. Additionally, the lenders would be held accountable, creating incentive for the banks to further help protect consumers from risky and potentially disastrous situations. These reforms would be most effective in situations of asymmetrical information.
However, current regulation is not wholly effective, and comes with certain risks. The first major criticism, made by the Chamber of Commerce, is that the current reform legislation does not target the credit and mortgage industries. These areas are where the 2008 recession stemmed from, and current regulation does not pinpoint these areas specifically. Additionally, it is argued that the legislation is vague, and is difficult to implement effectively. Furthermore, if implemented, there are worries that any reform legislation will hinder American competitiveness.
On the second goal, reforming the derivatives market, the effectiveness of the reform legislation is less ambiguous. Democratic and Republican lawmakers agree that adding transparency to the market will be effective in preventing some of the risky behaviors that brought the world's largest economy to a screeching halt. Additionally, the legislation will ban large firms from acting as both commercial banks and speculators on the derivatives market. This aspect of the legislation is similar to the Glass-Steagall Act, which largely prevented the systemic failures that characterized the 2008 collapse (the Glass-Steagall Act was repealed in 1999).
However, this reform means that we are unlikely to see the unbridled growth we saw from 2003-2007, that the booms so often associated with American-style capitalism will be softened by the regulation. Additionally, it has been suggested that the current bill does not do enough to simplify the current derivatives market, which could limit the effectiveness of the reform.
Finally, the current financial regulation bill is simply ineffective in preventing future bailouts. Rather than creating a sense of "moral hazard," the current legislation creates a 50 billion dollar safety net for banks labeled "too big to fail." This safety net could add to the deficit, cost taxpayers money, and incentivize risky behavior by large corporations.
In the end, the issue of financial regulation does not boil down to ideology. Rather, citizens and government officials alike must consider the costs and benefits of regulation, and make an informed, rational choice.
