My first reaction to news that the Congressional conference had finally agreed on language for the financial services regulatory overhaul: numbness. I didn't stay up all night to track the news as the Senators and Representatives worked until around 5:30am to finish their negotiations. But waking up this morning to read the headlines and emails in my inbox about it didn't evoke much reaction. The process has been dragged out for so long, and the end was inevitable.
It is frustrating. Even infuriating at times. We had a golden opportunity to rewrite the regulatory structure for finances in this country, ending too big to fail policies, ending perverse incentives in the market place, ending government distortions that caused so many of the problems we faced. Sadly, this is not what we've got.
Instead, conferees have agreed on a 2,000-page bill that not only fails to address many of the most severe problems in the system, but creates additional pains as well. The process was driven by politics, not a proper understanding of the causes of the crisis or problems in the system.
Even more irritating was Sen. Chris Dodd's—a leading author of the legislation—reaction after the final details were agreed on: "No one will know until this is actually in place how it works. But we believe we've done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done."
No one will know? Actually, we know a lot. There are very simple market forces at work. As I wrote yesterday, the unintended consequences of the CARD Act are a forerunner to how this bill will restrict credit. The systemic risk portions of the bill just make the too big to fail problem worse. The derivatives laws will cut into financial profits.
But the Senator is right in a way: we don't know how much of this bill will work. There are a host of unintended consequences at work here. Critics have predicted many of them. But there are sure to be a host of things even the most hardened opponents haven't foreseen. It is stunning, disheartening, and maddening that a bill would be agreed upon with the foreknowledge that "we don't know what this bill will do exactly."
The bill will certainly be passed by the house next week, and likely the senate. I assume that they conferees wouldn't have agreed to the legislation terms if they didn't think they had the votes in the Senate.