Will the financial reform bill really work?

I have been so busy rewriting my circus novel that I haven't had much time to attend to current events. So I was happy to see this op-ed piece on t r u t h o u t by economist Dean Baker discussing the financial reform bills currently being considered by Congress. Dean Baker, incidentally, is one of my favorite economists. You can see a selection of his work at the home page of the Center for Economic and Policy Research.

I have received several emails from barackobama.com, urging me to tell my Republican senators to support this reform effort. My question has been will this reform actually do any good?

According to Dean Baker, the answer is a big maybe.He says that the bills passed by the House and approved by the Senate Banking Committee would help prevent some of the worst abuses that we've seen over the past decade -- but that neither bill will prevent future economic crises. Furthermore, the recent reappointment of Federal Reserve Chairman Ben Bernanke "told future regulators that the failure to crack down on recklessness in the financial sector carries no consequence."

Baker identifies three possible additions to the Senate Bill that could help weaken the power of the financial services industry so that future crises would be less likely. First is an amendment proposed by Senators Brown and Kaufman which would put a size limit on banks. If banks are kept at a reasonable size, then they won't be "too big to fail" -- and thus the pressure for future bailouts would be much less. Second, an amendment by Senators Merkley and Levin that would prevent banks that are covered by federal deposit insurance from trading in the stock market. This amendment would restore some of the protections of the old Glass-Steagall Act. This would stop banks from "speculating in financial markets with the money guaranteed by the government." Finally, Baker says, the Senate will wrangle over the issue of how to regulate derivatives trading.

The bill that was voted out of the Agriculture Committee would prohibit commercial banks from being directly involved as brokers in derivative trading. The rationale is that this trading creates large risks and potential conflicts of interest. This would mean a major departure from current practice, since the six major banks currently control the overwhelming majority of derivative trading. If they had to spin off their derivative business, it would lead to a very different structure in the financial industry.

Without those three changes, Baker says, financial reform legislation will not make much difference in the way the financial services industry does business.

Not that they are likely to listen, but when I write to senators Inhofe and Coburn, I will ask them to support a bill that limits the size of banks, and prevents federally insured banks from trading on the stock market or speculating in derivatives.