Who would have guessed that the World Spirit has such a sense of humor?
A year to the day after Dodd-Frank allegedly gave regulators the powers they need to save us from reckless banks that are too big to fail, government officials, bankers, and regulators are meeting in Europe. They are trying to cobble together yet another rescue plan for Greece, while Portugal and Ireland wait desperately in the wings and Spain and Italy hold their breath. If the Eurocrats fail, any number of banks could knock over, bringing the world a “Lehman in reverse.” Only slightly less sensationally, there is a real chance that the European pow wow could lead to a “credit event” that would force financial houses that sold credit default swap protection (aka: insurance) against loan defaults to pay up.
Now here’s the really fun part: Remember AIG? American financial houses are widely believed to have written billions of dollars worth of those credit default swaps. Alas, the Fed and the Treasury do not know who is on the hook for how much. They hope, but cannot say for sure, that another AIG is not out there somewhere, capable of triggering chain bankruptcy again or starting big runs on money market funds.
That’s the Dodd-Frank “reform” in action. Sure, you can respond that this is only to be expected since, as Michael Hirsh reported in Newsweek, Congressman Barney Frank’s committee allowed Goldman Sachs to proffer nine pages of amendments to drafts of the bill covering derivatives. But I think this is too tepid. What’s happening with financial reform is not just business as usual. The money-driven American political system has now spun completely out of control. It imperils us all. We may escape this time, but the incentives are still there for the monsters to keep taking risks until they have to be bailed out by us again.
Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and Senior Fellow at the Roosevelt Institute