Sunday, August 03, 2014

Financial reform and the too-big-to-fail problem

Paul Krugman discusses the benefits of Dodd-Frank, which he rates as a major accomplishment of the Obama Administration (Good News on Financial Reform 08/01/2014):

The two big achievements of the Obama administration are health reform and financial reform. (Maybe carbon regulation will be added to the list; stay tuned.) For the most part, however, neither has gotten much respect. I think this may finally be changing on health reform, as the evidence piles up for a dramatic improvement in coverage in states that didn't obstruct the law. But financial reform is still unloved, attacked by the right as anti-business and by the left as too weak to work.
He focuses in particular on one complaint against financial reform made by the Republicans. Dodd-Frank give clear authority to the federal government to put too-big-to-fail banks in receivership in situations like the 2008 crisis. One criticism is that it left large financial institutions in a position to gain financing at favorable rates because of their presumed too-big-to-fail status. Krugman observes that it doesn't seem to be working that way:

And if financial reform was a giveaway to the banks, why did Wall Street, which used to look relatively favorably on Democrats, turn overwhelmingly Republican after reform passed?

Still, you’d like some evidence. And GAO has the goods. There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won't be as favorable to fat cats as the bailouts of 2008.

This news is part of broader evidence that Dodd-Frank has actually done considerable good, on fronts from consumer protection to bank capitalization. Of course it should have been stronger ...
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