In his latest piece for the New York Times, celebrated economist and best-selling author Paul Krugman argues that, quietly and under the radar, one of President Obama's most important early initiatives, Wall Street reform, is a clear success. "[L]ike Obamacare," Krugman writes, "financial reform is working a lot better than anyone listening to the news media would imagine."
Dodd-Frank is a huge and multifaceted bill, of course, so Krugman picks out two of its provisions that he believes are particularly deserving of praise: The Consumer Financial Protection Bureau (CFPB) and the bill's system of handling a failing institution that is "too big to fail" without rewarding irresponsible management and shareholders.
Of the CFPB, which was constructed in part by now-Sen. Elizabeth Warren, Krugman writes: "[A]ll accounts indicate that the bureau is in fact doing its job, and well — well enough to inspire continuing fury among bankers and their political allies." As proof of the CFPB's already-visible effects on financial markets, Krugman notes that the agency is "cracking down on billions in excessive overdraft fees," despite loud banker protest.
Concerning too big to fail, Krugman argues that Dodd-Frank has outperformed expectations, establishing and codifying a process through which a failing bank is held by the government until the crisis is over. "Dodd-Frank [gave] regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save 'systemically important' banks and other institutions without bailing out the bankers," Krugman writes.
But this, too, was contrary to the bankers' desires. Krugman continues:
Bankers, of course, hate this idea; and Republican leaders like Mitch McConnell tried to help their friends with the Orwellian claim that resolution authority was actually a gift to Wall Street, a form of corporate welfare, because it would grease the skids for future bailouts.
But Wall Street knew better. As Mike Konczal of the Roosevelt Institute points out, if being labeled systemically important were actually corporate welfare, institutions would welcome the designation; in fact, they have fought it tooth and nail. And a new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared. To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do.