The financial reregulation package just passed by Congress is far from a comprehensive reform of American finance. Despite the enormous threat to the world’s financial markets created by the failure of Lehman Brothers and the stunning excesses of insurance giant AIG and banking conglomerate Citigroup, the reforms are in truth modest. Neither the Obama administration nor Congress opted to cut banks down to size, and the bill is only placing mild limits on risky banking activities. The giant financial institutions, meanwhile, are as big—even bigger—than ever and bankers’ compensation is once again at stunning levels.
But the problem with the legislation is not merely its small scale. It is the way it is supposed to be implemented: to avoid controversy and get the bill passed, congressional reformers foisted the responsibility for setting most of the specific, sticky rules on federal regulators at the Fed, the Securities and Exchange Commission, and elsewhere, who are to make them over the next year or two. These are, for the most part, the same regulators who failed to stop the speculative excesses and ensuing credit crisis of 2008. While they now have a few more tools at their disposal, their already substantial tool box was barely touched in the years leading up to the housing and credit crash and severe recession. Will it be different next time?