Financial Regulations Reformed?
by Paul A. RaheOn Wednesday, if all goes as planned, President Barack Obama will sign the financial-reform bill crafted by Senator Chris Dodd of Connecticut and Congressman Barney Frank of Massachusetts, sponsored by the Democratic Party in both houses, and supported by three Republican Senators – Scott Brown of Massachusetts and Susan Collins and Olympia Snowe of Maine. When the bill is signed, we will be told, as we have repeatedly been told in the last few months, that the measures included within it will prevent future financial crises of the sort that we have suffered from over the last two years.

By now, of course, most Americans have become skeptical of such claims. We were to told that the so-called “stimulus” bill would bring unemployment down, and we learned that its main function was to reward constituencies favoring the party in power. It increased dramatically the salaries of those within the federal civil service, it expanded that civil service massively, and it enabled the state governments and the localities to continue to pay those who worked within the public sector at those levels. Similar lies were told during the healthcare debate. We were told that no one would lose his coverage, that no one would be forced to acquire health insurance, that the cost curve would be bent downward. It is proper to ask whether we are being lied to now and whether Senators Brown, Collins, and Snowe have sold us down the river.
The answer depends – to a considerable degree – on what were the causes of the recent financial crisis. Was it caused by a market failure? If so, is it likely that governmental regulation will prevent such failures in the future? These are the claims advanced by Paul Krugman and the like; these are the claims put forward by President Obama, Senator Dodd, and Congressman Frank. And, on the face of it, they would appear to be true. There was, after all, a bubble in the real estate market. Goldman Sachs and the like marketed junk bonds, made up of mortgages, on a gigantic scale and managed to get for them a triple-A rating from S&P and from Moody’s, and insurance against default was purchased from outfits like AIG that had no idea of the risks involved. The Securities and Exchange Commission and the Federal Reserve could and should have intervened.
But one must be cautious about calling what happened “a case of market failure,” for the real-estate market was not a free market. One could, of course, reply that no market is a genuinely free market. The “free market” is an ideal type. It does not exist in reality. The government interferes and gives shape to virtually every market through taxation, regulation, and laws detailing how contracts are to be enforced.






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