Over the past three months, I have been covering the topic of financial reform, the players in the game and the pros and cons of the Dodd-Frank Wall Street Reform and Consumer Protection Act. During the course of the semester, I have spent countless hours sifting through the text of the bill itself, reading through the opinions and news pieces of others and spoke with NYU Professor Roy C. Smith. So I will provide a summary of what I have discovered:
First, there are no easy solutions to financial reform. Financial regulations are by nature violations of free market capitalism, yet the failure of the free market has a tremendous and lasting impact on everyone from Wall Street to Main Street. A sobering fact: the November unemployment rate inched up from 9.6% to 9.8%.
Second, drafting financial regulation is tricky because it needs to both addresses the problem without hindering further growth. This is easier said than done in a Congress that faces pressure from lobbyist and voters and requires a thorough understanding of a rapidly changing economy.
Third, it is inherent in human nature to do what is best for oneself and while it is generally held that this is good for the economy, sometimes it is not. This hyper-rationality led to the run on banks in the 1920’s and the run on the shadow banking system in 2008, freezing the market. Yet regulating rationality is almost impossible.
Fourth, we need to be wary of creating hyper-powerful organizations such as the Federal Reserve, which often acts without any oversight. Allowing this to occur is a return to the monarchical governing style of the Dark Ages. Government agencies need checks and balances and we may have lost that with the Fed.
Finally, transparency is key to the functioning of a solid financial system. If we know what we are buying, we can keep things fairly priced. By human nature it is a given that we will create too much demand on certain assets. But if we at least have transparency, we can make smart choices.
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