Wall Street’s “Mitigated” Reform

In an interview with nouvelobs.com, Henri Sterdyniak, economist at the OFCE, the economic research center at Paris’ Science Po, believes that the American financial reform plans haven’t gone far enough to achieve their goal of preventing the crisis from happening again.

The “Dodd-Frank” bill, adopted Thursday, July 15, by the Senate, is being presented as a deep reform of Wall Street. Do you share this opinion?

In reality, this reform is mitigated. The crisis happened, so the American government wants to take measures that would have prevented it from happening. But they’ve stopped half-way.

Which parts of the reform haven’t, in your opinion, gone far enough?

The first example is that the bill wants to discourage banks from taking too much risk, from intervening in financial markets, from speculating on their own accounts. It makes such actions more expensive, but does not forbid them. There isn’t a clean separation between two very distinct roles: that of banker and that of financier. The same holds true for credit rating agencies. There will be surveillance because it would be difficult to do nothing, but no one is going so far as to create a public and transparent agency.

Is this half-hearted reform the work of banks or politicians’ lack of courage?

Both. Obviously, the banks are trying to maintain the status quo, but the government also showed itself to be exercising electoral prudence. American growth is very dependent upon the financial sector. In order to give the impression of wealth to Americans, there is a need for the financial sector, like through consumer credit for example. Going all the way with this reform would require changing the model. And the United States dares not do that, even though they know that not doing so is dangerous.

So they’re happy to try to emulate the European system only slightly…

On some points, at least. Concerning real estate loans or consumer credit, American institutions have always been more adventurous by accepting the idea of hypothetical credit, independent of revenue. In this regard, we can say that they are coming a bit closer to the European system by becoming more prudent.

However, they are a step ahead of the E.U. with the creation of a regulatory body responsible for supervising financial stability and controlling big banks for systemic risks [to the financial system]. Obviously, as for any institution, everything is dependent on the people at the top.

Large banks will be regulated by this institution, but will the reform have an impact on their profits?

Yes, if the regulation is strict. Demanding more capital from banks before they can participate in the markets or obliging them to create affiliates for part of their activities will curb their growth. But they might blackmail growth by insisting that all these restrictions will limit employment. The authorities will have to have a firm doctrine: “Speculation only brings transitory gains.” And they must maintain it.