Why Wall Street Reforms Have Stalled


By The Editors
New York Times
September 12, 2009



Scott Reynolds Nelson, a historian of American financial crises, discusses the reliance and conflict between the federal government and financiers going back to the nation’s founding.

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One year ago next week, Lehman Brothers went bankrupt, Merrill Lynch was sold and A.I.G. was rescued by a huge federal bailout. In the wake of the global financial crisis, Congress and regulators vowed to end Wall Street’s profligate risk-taking and the compensation structures that rewarded that behavior. Yet looking back, experts say not a lot has changed in that culture, and efforts to control risk and reform executive pay have stalled.

Why is it so hard to regulate Wall Street? Has the financial industry always been better able to block government reforms than other industries?

Yves Smith, financial analyst
Russell Roberts, professor of economics
Jeffry A. Frieden, professor of government
Nicole Gelinas, Manhattan Institute
William K. Black, former banking regulator
Edward Harrison, banking and finance specialist
Scott Reynolds Nelson, professor of history

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Too Much Power for the Few
Yves Smith has written the blog Naked Capitalism since 2006. She has spent more than 25 years in the financial services industry and currently is head of Aurora Advisors, a management consulting firm.

Wall Street has become hard to regulate because we’ve allowed it to evolve that way. Credit is vital to any economy beyond the barter stage. As commerce became large scale and more interconnected, bank failures, which were once local affairs, increasingly led to widespread panics that produced considerable harm. As a result, government not only started to provide more safety nets for banks but also supervised them and placed limits on their activities.

Since the 1980s, lending has shifted from banks to the capital markets. While many loans do remain with the bank that originated them, in the U.S., what Treasury Secretary Timothy Geithner has called “market-based creditâ€