Financial Reform: Let's Hope This Modest Bill Is Just the Beginning

Last Updated May 27, 2010 12:45 PM EDT

Breathe, people, breathe! The Atlantic's Joshua Green injects a welcome dose of perspective into the debate over financial reform by noting that the momentous bill emerging in Washington is, in fact, a fairly humble document:
Pronouncements are made about the historic nature of the new law ("The most profound remaking of financial regulations since the Great Depression,'' declared the Washington Post). The key figures, like Senators Blanche Lincoln and Christopher Dodd, are lionized ("Dodd Prepares to Depart in Triumph,'' blared The New York Times). All of this is routine and customary and to be expected. It's also lazy and misleading.

Politicians tout modest reforms as being great ones. They act in their own self-interest. And they often can't gauge a law's effectiveness until years after the fact, though you'll rarely hear this. For the press, the tradition of "writing for history'' entails burnishing the story, and that often means subordinating what was really at stake and why the major figures acted as they did.
It pays to keep a few things in mind as our eyes mist over when President Obama finally signs the reform legislation into law, Green says. For one thing, the new financial rules appear epic mostly because Congress spent decades stamping old rules out. When you're dying of thirst, in other words, a mud puddle tastes like Cristal. As the remedy to a crisis of global proportions, this bill is distinctly modest, and a long way from the legal and regulatory reboot that followed the Great Depression. Says Green:
No bank will be broken up, no government agency punished, no Wall Street executive denied his bonus.
That's stretching it a bit, since the Office of Thrift Supervision is set to vanish after having proved itself inept at supervising thrifts. It also remains to be seen what pain the SEC and other federal regulators, if not Congress, ultimately mete out to banks over synthetic derivatives, mirage accounting and Wall Street's other flimflammery. But he's essentially correct in saying that the post-bellum financial landscape will look very much as it did before hostilities broke out. Plus ca change.

Yet one thing has changed: us. The financial crisis has, if only temporarily, removed the blinders. Certain shibboleths -- the "efficient market hypothesis," the rational investor, the genius of Alan Greenspan -- have been, if not slain, then cut down from their mythical dimensions. "Too big to fail" financial firms will continue to roam the land, but at least we know they're out there trampling through the underbrush.

A minor consolation? Not necessarily. A notable dynamic has shaped how lawmakers, Democrats and Republicans alike, are treating the fight over financial reform -- fear. If not for the public outrage aimed at the Street and their vassals on Capitol Hill, the reform bill would be far softer than it is. It wasn't Chris Dodd's or Blanche Lincoln's conscience that steeled their resolve to propose real change; it was their terror of the mob.

We've seen this before. The 19th century agrarian firebrands who initially sought to reform federal farm policy eventually found their way to Wall Street. They challenged the "money power," that era's analogue to our own "too big to fail" firms. And in important ways they won. Not at the stroke of a president's pen, but over many years and with many setbacks. Economic ideas changed, as did politics. Said populist leader William Jennings Bryan in 1896 his famous "cross of gold" speech:
We do not come as aggressors. Our war is not a war of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and they have mocked when our calamity came. We beg no longer; we entreat no more; we petition no more.
We defy them!
Those were different times, of course. And it's true that financial reform today isn't nearly so defiant of the powerful interests that mock our own economic calamity. But it's a start.

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