Awaiting the Next Financial Reform

The first financial reform brought on by the economic crisis is on its way to being adopted in Washington. It should be followed by others sooner or later, notably in Europe and at the international level. Their goal, though they may not prevent the advent of a brand new international crisis, will at the least be to prevent the last one from repeating itself and the next one from causing so much damage.

Five or six years will be necessary before we will be able to clarify the nature and the exact causes of an economic debacle whose severity the planet has just experienced, experts say. Obviously, no one wants to wait that long before trying to correct things, even if the risk of missing the target, or even noticing the problem elsewhere, is great.

In Washington, they didn’t even want to wait for the conclusions of the Congressional investigative committee charged with shedding light on the crisis, whose report is expected to be released at the end of the year. We feared, along many other fears, that the banks’ obstructive capabilities would not go past that point. They also wanted to have something concrete to offer to voters during the mid-term elections this autumn.

Adopted at the end of last month by the House of Representatives, after a dizzying amount of discussions, the Dodd-Frank reform could obtain the approval of the Senate and be promulgated by the president after this week. The 2,319-page brick would be, according to Barack Obama, “the strongest financial reform since those adopted on the heels of the Great Depression.”

Until today, the reform proposal seemed to attract as much criticism as praise, and this from the left and the right. Although not a revolution, everyone sees in this an effort by the state to regain a bit of authority over the financial markets. Everyone is also making the remark however, that it remains for now a simple and often blurred canvas, and that its translation to concrete actions, left to a plethora of governmental agencies, could take many months, if not several years.

The White House would like to serve as an example to the governments of other countries, but some are doubtful of this. “In fact, Dodd-Frank is too idiosyncratically American and too incomplete to be a true template for others,” observed the British magazine The Economist ten days ago.

During this time, in the rest of the planet

It is true that, at this time, the European countries are not advancing, or are doing so at a turtle’s pace. The only mutual reform project to have reached completion until now was clinched last week and only applies to the mode of bonus payments to the directors of financial institutions. The times that we move are few and far between, such as on that beautiful day in May when Angela Merkel took everyone by surprise in announcing the banning of short selling in Germany.

This stagnation has nothing to do with a wish to reflect on complex questions, and everything to do with the usual struggles within the European Union. Notably, one recognizes the desire of the United Kingdom to protect the bases of commerce in the city of London, of France to reinforce European institutions, of the German government to save its skin in the next elections and of all the countries to preserve the maximum sovereignty in the matter.

In the defense of the Europeans, they are not the only ones to have trouble seeing beyond their differences and to agree on common tools for restoring order in a sector whose playing field stretches across the planet.

The G20 countries, for example, are engaged in raising the international standards on the quantity and quality of bank assets in order to render them more resistant to shocks. They are, however, still far away from being ready to pass from lovely talks to actions, as much as each one tries as it may to reduce the effort of its own financial institutions. The risk is big that what we will one day call “The Basel III accords” will be nothing more than their lowest common denominator.

But suppose that all goes well, that the Dodd-Frank reform is adopted as foreseen, that the Europeans come to an understanding and that the G20 countries keep their promises. Will that prevent the eruption of a new financial crisis? Don’t count on it, say economists Kenneth Rogoff and Carmen Reinhart in their famous work entitled “This Time Is Different,” that analyses eight centuries of financial crises. “We will have other financial crises. The question is simply to know the frequency of such crises.”

All right. In this case, will the tentative reforms at least make it possible to prevent a repetition of the crisis that we have just seen, to reduce the gravity of others that will follow and to improve the efficacy of interventions by governments? We hope so. But that’s not a certainty. “We will know, unfortunately, only when the next crisis erupts,” Democratic Senator Christopher Dodd, one of the two patrons of the American reform, declared to the New York Times.

Editor’s note: Aside from the Economist statement, the quotes above, properly translated, could not be verified.