Everyone talks about implementing serious reform of the financial system, starting with the way we regulate large, complex systemically important financial institutions. Unfortunately, we lack even the basic political equipment to implement any worthwhile reforms.
As Thomas Frank points out in the Wall Street Journal, the reforms that were implemented following the crash of 1929 were the product of the famous Pecorra Commission. Led by a former New York attorney general named Ferdinand Pecorra, the Senate Banking Committee delved deep into the practices of Wall Street to discover what was working, what was thoroughly corrupt and what needed to be reformed.
While there are grounds to critique the Pecorra Commission, it was a sober and sane affair. It exonerated some publicly loathed business practices, such as short-selling, and concluded that some of the biggest financial institutions needed to be broken-up. The public nature of the hearings, closely covered by journalists at the time, provided something of an education for the citzenry on the structure of the financial system. This created broad political support for reforms, most of which were relatively straight-forward rules easily understood by at least the more informed members of the public. The Glass-Steagall Act, the Securities Exchange Act, and other financial regulations of the Roosevelt era were all products of its investigation.
None of that is likely to happen this time around. Our lawmakers are too throughly involved in this crisis too hold anything as comprehensive as the Pecorra Commission. The head of the Senate Banking Committee, Chris Dodd, is widely viewed as thoroughly compromised by the financial sector. Barney Frank, who leads the House's financial oversite board, was one of the greatest defenders of Fannie Mae and Freddie Mac, those housing bubble centers of corrupt accounting, dangerous securitization and politicized lending.
The crisis today is not solely one of bank misbehavior. This is also about the failure of the regulators -- the Wall Street policemen who dozed peacefully as the crime of the century went off beneath the window.
We have all heard the official explanation for this failure, that "the structure of our regulatory system is unnecessarily complex and fragmented," in the soothing words of Treasury Secretary Tim Geithner. But no proper Pecora would be satisfied with such piffle. The system was not only complex, it was compromised and corrupted and thoroughly rotten even in the spots where its mandate was simple.
This is good as far as it goes but it doesn't go far enough. Frank believes that poltical leaders in both parties will be too embarrassed by their support for financial deregulation to launch anything like a Pecorra II. Perhaps. But something else is at work here too.
In the 1920s, the financial sector was far less intertwined with the poltical apparatus than it was after the reforms that emerged from the Pecorra Commission and the New Deal. This meant that lawmakers were less compromised by ties to Wall Street, less involved with the crisis. They could take an outsiders view because they were outsiders.
Ironically, the very reforms of those outsiders transformed them into insiders. "Launching Pecora II would automatically raise this question: Whatever happened to the reforms put in place after the first go-round?" Frank asks. The answer to that question is that the reforms were self-devouring because the political dynamics of active regulation are a recipe for corruption and capture. Like Orwell's farmers and the pigs sitting at the table playing poker, it wasn't too long before it became hard to tell who was playng which role in the relationship. It really shouldn't be a surprise that politicized finance gave the system swine flu.
Is there any hope? Perhaps we can find a ground for hope in the fact that we are now familiar with this swinish dynamic in a way the Pecorra and the Senate Banking Committee of the 1930s were not. In attempting to reduce the costs of corruption on Wall Street, they didn't anticipate the risk of corrupting politics. We know better. That, at least, is a starting point.