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C071010_Financial_Reform_Arjun_Jayadev

C071010_Financial_Reform_Arjun_Jayadev - COMMENTARY...

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COMMENTARY Economic & Political Weekly EPW July 10, 2010 vol xlv no 28 17 Financial Reform in the US: A Brief Overview Arjun Jayadev The final contours of the legislation on financial reform that is being enacted in the US are now clear. If the objective was to tackle the most egregious excesses of a wildly out-of-control sector, the bill that will eventually emerge is a reasonable effort. If the goal, however, is to conceive of and develop a 21st century financial sector that is an aid to the real economy and that assists in creating widespread prosperity, then this effort should be seen as a cynical attempt that will fail to do the needful. Proponents of this view suggest that the approach adopted has been regulatory as opposed to structural. The reform process has progressed as if the fundamental problem was a lack of prudential regulations as opposed to the actual social functioning of the financial system in the US . L ast month, the financial reform bill in the United States underwent a reconciliation process, whereby the Senate and House of Representative bills are debated and brought together as a final piece of legislation. The process has been long and winding and like the recently passed healthcare bill has generated a substantial amount of political conflict and drama. A great deal of heat has been generated by particular amendments and technical details such as the nature of dealings with derivative contracts, the level of capital requirements for different sorts of financial entities, and proprietary trading. While these are extremely important debates, it is worthwhile for a moment to step back and remember the reason as to why this legislation is so important. The deregulated financial system of 1999- 2008 inflicted an economic disaster of a scale not seen since nearly 80 years, not only on the US , but on the whole world. As a direct result of a poorly regulated finan- cial system, the US built up a $8 trillion housing bubble, the collapse of which de- stroyed consumer demand and in turn wreaked havoc with economic activity and with public finances. The US has seen a sharp increase in public debt to the or- der of 40% of the gross domestic product ( GDP ) driven by a large fall in tax reve- nues. The US economy is extraordinarily fragile (as evidenced by the miserable job growth numbers in June), and policy- makers appear (at least in the public im- agination) to be running out of options and opting for a policy that will lead to an extended period of stagnation and high unemployment. 1 Given this bleak outlook, one would im- agine that there would be a large coterie of “financial reform hawks” among policy- makers who would have as their highest priority ensuring that the financial system in the US is restructured to be socially pro- ductive and to prevent future crises. As it stands, if the goal of financial reform was to tackle the most egregious excesses of a wildly out-of-control sector, the bill that would eventually come out is a reasonable effort. If the goal, however, is to conceive
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