Financial Reform in 2009: A Research Proposal

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Bank of America and Merrill Lynch would have to be separated and Goldman Sachs could no longer be a bank holding company. "Commercial banks would take deposits, manage the nation's payments system, make standard loans and even trade securities for their customers -- just not for themselves. The government, in return, would rescue banks that fail. On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks. Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail -- a designation that could arise for a handful of institutions under the administration's proposal" (Uchitelle, "Volcker," 2009).

The Volcker proposal seems sensible, as depositors would be insulated from risk, be able to make standard loans and have their deposits insured. Commercial banks would have the confidence that they could make such loans to consumers with the support of the government. Investment firms could take larger risks, but only consumers with an appetite for such transactions would become involved in such firms. However, while the firms would be less closely regulated, they would also have less financial support from the government, should they fail (Uchitelle, "Volcker," 2009).

But the bank lobby is powerful in Washington, D.C. In 2006, banking lobbyists vigorously opposed seemingly sensible and moderate attempts to rein in the industry practices, including limitations on banks that held large commercial real estate properties. Regulators have been reluctant to curtail speculation during 'good times' and often do not vigorously enforce legislation 'on the books.' "Of the nation's 8,100 banks, about 2,200 -- ranging from community lenders in the Rust Belt to midsize regional players -- far exceed the risk thresholds that would ordinarily call for greater scrutiny from management and regulators" (Dash 2009, p.1). This suggests that further regulation, without a will to enforce it on the part of the government, may accomplish little.

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A failure of political will seems endemic to the system. Just as government regulators did not take measures to limit the financial fallout from the housing bubble; they are complacent now that the economy is improving. Bank lobbyists are more powerful and knowledgeable about the financial sector than average voters. Furthermore, there is a bind given the state of the current economy -- too much credit caused the crisis, but a tight hand upon lending can impede economic growth. While "policy makers are considering a variety of measures that would generally strengthen banks' finances and limit their ability to lend money aggressively in risky areas like construction. Bankers contend that such steps would not only hurt their businesses but also the broader economy, because they would throttle the flow of credit just as growth is resuming" (Dash 2009, p.1). Efforts to regulate the banks in a serious manner in the near future seem unlikely. Consumers may enjoy the brief surge of prosperity from the growth in jobs and access to loans but efforts at truly major reforms that could protect average citizens and the stability of the world economy have stalled. Bank lobbies are powerful, and other than executive pay, financial news does not grip the public's attention because of its complexity. Without the will of regulators to enforce existing laws, the world financial market may have to steel itself once again for another roller coaster, given the shortness of consumer and Congressional memories.

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