It’s final exam week at my local High School, and the topic of passing and failing grades is a staple at our kitchen table these days. So, a new poll showing that Americans are growing antsy with President Obama’s handling of the economy had me wondering whether the presidents financial regulatory plan announced yesterday would garner a good report card grade.

It seems not so much.

On Wednesday night, Paul Krugman was on PBS’s NewsHour discussing the President’s new economic regulation proposal, joined by Diane Casey-Landry, a bank lobbyist, as his counterpoint. As expected, the lobbyist thought the regulations went too far and Krugman thought they did not go far enough:

Ideally, I would like to see something even stronger. I would like to see them tackle the issue of compensation schemes.

The bank lobby is apparently opposed to the proposed Consumer Financial Protection Agency, which provoked an ironic reaction from Prof. Krugman:

One thing I was concerned about was whether this consumer financial protection agency would be toothless , but the opposition of [a bank lobby group] makes me believe that it’s not such a bad idea after all.

According to Krugman, the President’s plan does not tackle the biggest problems, like systemic risk.

Interestingly, this complaint appears to be supported by the banking sector. Ms. Casey-Landry repeatedly made the point that major features of the financial crisis were not caused by regular banks or savings and loans, but rather by unregulated mortgage companies, or what she called "shadow banks," and by the role of players like AIG, and by what she called "systemically significant institutions" (which I took to mean anybody deemed "too big to fail").

Eric Dash points out in the New York Times that the plan does nothing to address the role of the ratings agencies and the inherent conflict of interest in their business model:

In the overhaul of financial regulation proposed by the Obama administration on Wednesday, rating services – which, during the boom, stamped high ratings on many subprime securities – will avoid the radical changes their detractors have urged.

While the administration is proposing some modest changes, none addresses what many see as the central problem: Services like Moody’s and Standard & Poor’s are paid by the companies whose securities they are evaluating. It is as if Hollywood studios paid movie critics to review their would-be blockbusters.

The NYT economic blog does not seem very impressed with the President’s proposal (actually Tim Geitner and Larry Summers’s proposal), suggesting it is weak and continues to place additional oversight responsibilities on agencies–like the Federal Reserve, which was one of the biggest cheerleaders/enablers of the bubble, and the SEC, which has become emasculated in recent years–which failed to prevent this crisis in the first place. In fact, the idea of expanding the role of the Fed does not seem to be met with much enthusiasm at all.

Like Krugman, and, in a post here on FDL yesterday, Nomi Prins, the Times’ Simon Johnson seems intrigued by the idea of the Consumer Financial Protection Agency, but also thinks that is not nearly enough:

There is, however, one interesting piece – the creation of a Consumer Financial Protection Agency (section 3). The president himself seems to recognize that previous consumer protection was scattered and ineffectual. A strong agency could help protect us all both in boom times and during crises.

But protecting consumers is not the same thing as protecting investors and taxpayers. Major financial players will once again be able to float bubbles, creating the illusion of growth and the reality of further expensive bailouts.

Our financial sector has become very powerful politically – and these proposals are a further sad reminder of that fact.

[emphasis added]

In short, the new plan does not seem to be the kind of sweeping change and major overhaul the US undertook in the 1930s. Perhaps this is because the solution is being proposed before the problem and its causes have actually been investigated. Maybe Nancy Pelosi is right and we need a new Pecora Commission. The legislation creating such a body was signed into law on May 20th. Maybe it should be staffed up and get to work investigating the causes of the problems with specificity so that we might have actual factual data upon which to build a solution.

Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.