After the Fall, Little Progress on Financial Reform

Last Updated Sep 15, 2009 3:20 PM EDT

A year removed from the failure of Lehman Brothers, from peering into the economic abyss, and the patient is doing just fine. Phew, close call! Now let's get outside and enjoy the sunshine. Investors feel frisky again, banks are pulling their structured finance playbooks down off the shelf. Washington and the usual lobbyist suspects are doing the Lambada.

Has anything changed? At the margins, yes. There's a growing consensus that big banks should play it safe by keeping more money in the vault (you know, just in case). Regulators have woken up from their van Winkelesque snooze. Derivatives make us somewhat antsier than they used to. Alan Greenspan's mug is no longer destined for Mt. Rushmore, and people may be a tad more skeptical about cockamamie ideas like the efficient-market hypothesis. No, Virginia, there is no Santa Claus.

Mostly, and not all that surprisingly, things are pretty much the same -- in some ways, more so. Financial companies once too big to fail are getting too big to bail. Banks not only still tote around trunk-loads of toxic debt, but now expect to cash in on it through the alchemy of accounting. Leverage is gushing. Despite much teeth-gnashing by lawmakers, Wall Streeters can still count on a new Porsche during bonus season, rain or shine. Faced with discomfiting truths about the influence of finance on government, we turn away, abashed.

Most notably, government remains befuddled about what to do. The White House is reduced to pleading for something, anything resembling financial reform. The Fed, pegged to take over as "macroprudential regulator," keeps chanting that the recession is over like a Zen koan, hoping that in our trance we'll forget that its monetary policies helped trigger the crisis. Even the proposed Consumer Financial Protection Agency is splintering on the shoals of industry lobbying and partisan bickering.

Anyone else getting a feeling that we're just kicking the can down the road? I know these things take time. FDR didn't enact Glass-Steagall, the law that until 1999 kept banks out of other financial cookie jars, until 1933, four years after Black Tuesday. Forming the SEC also took years (worth recalling that Roosevelt wasn't above cutting a deal or two -- he appointed Joe Kennedy Sr., never known for his fidelity to the free market, as the agency's first chairman).

But times obviously are different than in the '30s. For one, there's little public and political will to make fundamental changes, and what will exists is handcuffed by what pass for political realities. For another, we're a different country. As the market spreads its wings, everyone has become a shareholder, for better and for worse. And the kind of populist politics that took decades to gather force and that eventually swept FDR into office have only recently come out of hibernation (and even then greatly attenuated).

Yes, we're off life support, but the prognosis looks iffy. Open wide.

Images courtesy of Flickr user Klewfoto and the Olin and Uris Libraries.

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    Alain Sherter covers business and economic affairs for