Finally, finally — moves toward a game-proof system

Image by Getty Images North America via @daylife

I feel vindicated.  I’ve been hollering for years now that it is futile to expect financiers to act in anyone’s best interest but their own — like the scorpion, it’s in their nature. And finally, Washington is coming around to the realization that it is industry’s job to look for loopholes in regulations, and it is government’s job to plug them. In other words, if people are gaming the system, don’t waste time chastising the gamers. Game-proof the system.

And that is the direction in which financial reform is finally moving.
Here’s how the New York Times lays it out:

The financial legislation passed by the Senate last week, largely built to specifications that the administration provided last summer, vastly increases the scope and sophistication of federal regulation. It grants more resources and more authority to those charged with overseeing the industry. It is hoped that this will produce better results.

The bill does not, as some liberal Democrats and populist Republicans had advocated, require the breakup of conglomerated behemoths. It does not prohibit some of the most speculative genres of Wall Street trading. It does not reduce the vast menagerie of financial companies that compete with banks.

In other words, it isn’t trying to remake the financial industry from scratch. It’s saying, okay, this is what we’ve got, let’s admit there are some very good things about it — including the competition from that “menagerie” — but that it can’t be trusted to police itself. So let’s let the tiger hunt in its prescribed territory, but let’s reinforce the bars on its cage.

What’s so interesting is that, in their zeal to preserve the financial system pretty much intact, a growing number of Washington regulators are placing the blame for the financial meltdown squarely on their own shoulders. Timothy Geithner and Lawrence Summers are both now conceding that the failure of regulation — the lack of some rules, the lack of enforcement of others — is what enabled the financial industry to lead the world economy down such a destructive path.

They still face a large cadre of Senators and Congressmen/women who will not be happy unless big banks are broken up, or unless derivatives trading is prohibited (or at least severely restricted). That side will probably cave as the reconciliation process goes on.

The reason is that — and yes, I hold my nose as I say this — when you come right down to it, we really do need a big, active, flush financial industry to pump capital into the economy. But we need to keep it from preying on consumers — an activity that will be made far more difficult when the proposed consumer financial protection agency is established. We need to prevent debacles like the crash of derivatives — something the new bill will do, too:

For example, the bill requires most, but not all, derivatives to be backed by a third-party clearinghouse, adding a layer of insurance to the system. If either side fails to meet its obligations, the clearinghouse steps in.

The most important thing is that the bill provides for a lot more money and people to be dedicated to regulating finance. And it gives them the power to do their jobs.

I realized how hopeful I was today, when my broker suggested I buy some Morgan Stanley bonds. Are they safe? I asked. They are, he said. And I actually believed him, and told him to go ahead.

I may live to regret that decision. But the fact that a cynic like me has taken her money out of the mattress (my definition of keeping it in cash at paltry interest rates) means that maybe, just maybe, Washington’s moves to restore faith in the financial system may be starting to work.

(Oh, and just in case your curious about the picture — I quote my former employer so much, it seems only fair I at least visually concede that it has a major rival)