Published Opeds on Financial Reform: May 2010 Archives

by Roy C. Smith

After a yearlong effort to get it right, the U.S. Senate passed a financial overhaul bill last week that actually weakens the government's ability to manage the next financial crisis. The House version passed last December is better, but not much.

Neither measure effectively addresses the problem of the 10 to 15 too-big-to-fail U.S. financial companies, which in the past occasionally have required bailouts to prevent their collapse and a consequent panic in financial markets.

Nothing in either bill requires banks to become smaller, or discourages them from becoming even bigger. Undoubtedly, many institutions will grow larger. After all, regulators already encouraged JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. to acquire large failing financial companies during the recent economic crisis. Very large banks have difficulty managing all the different risks they carry, and periodically one or another of them fails at it.

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Euro Is in Fiscal No Man's Land

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by Jonathan Story and Ingo Walter

The new agreement by European Union members to stand together with the International Monetary Fund in support of Greece's effort to stave off fiscal calamity marks a turning point in a grand experiment that stood the relationship between politics and high finance on its head.

Unlike the U.S. after 1865 or Germany after 1989, where political unity created monetary unification, the launch of the euro in 1999 was just a monetary event and presumed that a political merger of EU states would come along eventually.

This has never been accomplished before, and it hasn't worked out as planned. The recession of the last year laid bare the structural divide that has existed and widened in the EU. It has provided a key lesson during the Greek debt crisis, which at more than $146 billion will be the most costly bailout ever.

Greece and its Club Med partners -- Portugal, Spain and Italy -- haven't come close to keeping pace with the German manufacturing industry in driving down relative unit-labor costs. The gap continues to widen. Year by year, the frugal Germans have won market share in the EU, which now absorbs more than 65 percent of their exports compared with about 45 percent in the mid-1990s, but Germany's key consumers are running out of purchasing power to keep its export champions humming. Long-term overproduction lies at one end of the chain, overconsumption lies at the other end, with growing and ultimately unsustainable debt linking the two. A single currency and monetary policy join them at the hip.

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The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors