By Simon Johnson
The official reconciliation process between Senate and House reform bills will get underway next week, but the behind-the-scenes maneuvering (and intense lobbying) is already well underway. The main remaining question is whether the final legislation will ultimately make the financial system at all safer than it was in the run up to the crisis of September 2008.
How do big banks repeatedly get themselves into so much trouble? Dangerous banking in today’s world involves banks trading securities and, in that context, taking positions – i.e., betting their own capital. For example, almost all the profits made by big banks in 2009 came from securities trading. When market conditions are favorable and traders get lucky, the people running these banks (and hopefully their shareholders) get tremendous upside. But when this same risk-taking behavior results in big losses, the major negative impact is felt in terms of a major recession, raising government debt, and sharply lower employment.
“Wall Street gets the upside, and society gets the downside” is an old saying that is now more relevant than ever. This asymmetry in incentives explains how smart people with concentrated financial power can cause so much damage – according to, for example, the Bank of England’s analysis. Continue reading “Decision Time: Has the President Abandoned Paul Volcker’s Ideas On Financial Reform?”