• “… the most comprehensive financial regulatory overhaul since the Great Depression … (aimed at stopping) risky behavior on Wall Street that imperiled the U.S. economy.” (Reuters)
• “… nothing more than a financial regulatory boondoggle. It won’t strengthen our capital markets, it won’t jumpstart the economy, and it won’t help create any new jobs except in government.” (U.S. Chamber of Commerce CEO Tom Donohue)
• “The American people overwhelmingly want to see Wall Street reform.” (Sen. Robert Menendez, D-N.J.)

So what’s the truth about the financial reforms and how they will affect the economy? It’s complicated.

Certainly we needed more regulations, oversight and transparency. The legislation will create a Consumer Financial Protection Agency, with the authority to ensure that consumers get clear, accurate information about mortgages, credit cards and other financial products and are protected from deceptive practices and hidden fees.

That’s good. The general public was not as well-versed in financial matters as the lenders. That led to some asymmetrical practices such as sub-prime mortgages that helped cause the current recession.

The reforms will also create a 10-member Financial Stability Oversight Council, a group of regulators who will keep watch over the nation’s entire financial system.

Regulators will also implement new standards for how much capital banks should hold in reserve to protect against losses.
The legislation is certainly the most far-reaching financial reform since the Great Depression. But while all this sounds good in theory, the reforms are little more than a framework at this point. Ultimately, this legislation will spark many more rules and regulation than it contains now.

It may take up to a year or longer for Treasury Department and other officials to write the regulations enforcing the law. The final policy implications may take years to determine. It’s like dropping a stone in a pond and waiting to see how big the ripples are.

Another question: How stringently will the regulations be enforced?

For example, Sen. Christopher Dodd, R-Conn., who helped put the bill together, said the intent was to prevent another financial crisis like this recession. But when Federal Reserve Chairman Ben Bernanke testified before Dodd’s committee, Dodd basically said that the reforms would only work if the Federal Reserve did its job. That sounded like both taking credit for the reforms and passing the buck if they don’t work.

When considering the effectiveness of financial reform, it’s key to remember that regulators aren’t going to stay with the government forever. When they leave the federal post, where are they most likely to end up? In the industries they’re currently regulating. There’s nothing unethical about it; their expertise in a certain industry makes such a move logical.

But it means that the regulators take a different view of the companies they’re regulating because those are their future employers. For that reason, the financial regulations may not be as rigidly enforced as some hope.

Can we make any definite conclusions about the impact of the financial reforms? Yes. Fewer loans are likely to be made as a result of the legislation. As a banker, you get blamed for the bad loans. You don’t get blamed for the good loans that aren’t made. So we can expect a more cautious approach to lending.

Also, it’s unlikely that the financial reforms, no matter how beneficial, will prevent another financial crisis. The financial safeguards put into place after the Great Depression, for example, failed to prevent the current recession. That’s because the root causes of the financial troubles are different. We can only truly understand what precipitated a financial crisis when we get on the other side of it—and even then, it’s not guaranteed. More than 80 years later, some economists do not totally agree on what caused the Great Depression.

We won’t know the effectiveness of the financial reforms until years down the road. This legislation has dropped the stone in the pond. Let’s watch the ripples spread.

Chuck Williams is dean of the College of Business at Butler University. Bill Reiber, economics professor at the COB, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness or e-mail Chuck at

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