New York Times: Modest Reform Won’t Do It

A recent editorial in the New York Times talked about the need for sweeping financial reform in order to effectively deal with the nation’s economic problems, and the hurdles that reform legislation must face as it moves through the Senate.  It said:

Nearly a year ago, as the Obama administration issued a first draft of its plan to reform the financial system, Treasury Secretary Timothy Geithner forcefully — and correctly — declared that anything less than a total overhaul would be inadequate. “Our system failed in fundamental ways,” he told Congress. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”

That is just as true and just as urgent today. Memories may be fading of how close the system came to imploding, but the dangers are still out there. Greece’s sovereign debt crisis — now imperiling Europe — is the latest reminder, and like the American meltdown, it involves largely unregulated derivatives transactions. Greece used a derivative swap arranged by Goldman Sachs to mask the true size of its public borrowing.

The editorial focuses on the way a lack of oversight of derivatives regulation hurt the American economy, and closes with this thought:

Such oversight was missing before the financial crisis, when regulators generally allowed banks to sell  anything that turned a profit. The result was disastrous subprime lending and other dubious loans.  Without a strong consumer protection regime, banks are bound to revert to the pre-crisis status quo when the coast is clear.

There are many other examples of how the components of regulatory reform work together — but not in isolation. President Obama understands this, as does Mr. Dodd. They need to hold their ground when banks and their Republican opponents fight back.

Click here to read the full editorial.