This Wednesday, Feb. 13, 2013 photo shows the Wall St. sign in New York.
AP Photo/Henny Ray Abrams

Wall Street reforms showing signs of success

Updated
Ask President Obama’s supporters about his accomplishments and you’ll likely hear about some of the higher-profile victories: ending the Great Recession, bringing health care to millions, rescuing the auto industry, bringing troops home from long wars abroad, advancing civil rights of LGBT Americans, reforming the student-loan system, killing Osama bin Laden, etc.
 
But let’s also not forget the Wall Street reforms signed into law in 2010. As Paul Krugman recently noted, the “Dodd-Frank reform bill has, if anything, received even worse press than Obamacare, derided by the right as anti-business and by the left as hopelessly inadequate.” That said, Krugman added that the law appears to be getting at least one big thing right.
If you go back to what happened in 2008, you had a situation in which the impending collapse of some key financial institutions threatened to bring down the whole world economy…. This episode created a concern: now that everyone knew that big financial institutions would be bailed out if they went bad, wouldn’t this (a) give such too-big-to-fail institutions a continuing advantage, because their government guaranteed safety would make them able to borrow cheaply, and (b) encourage irresponsible behavior? And there was a fair bit of evidence for (a): large financial institutions did indeed seem to have a funding advantage.
 
To deal with this, Dodd-Frank created Ordinary Liquidation Authority, otherwise known as resolution authority – giving the government the legal authority to seize institutions the way it arguably should have in 2008-2009. […]
GAO has the goods. There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away – maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.
All of this comes on top of the important and worthwhile work being done by the Consumer Financial Protection Bureau, which was created when Wall Street reform was signed into law.
 
Krugman, incidentally, isn’t the only one who’s noticed that Dodd-Frank is having a positive impact.
 
Mike Konczal made the case a few weeks ago that the reforms “are finally paying off.” Matt Yglesias added, “Perhaps America’s largest financial institutions know a thing or two about financial regulation, and are fighting the law because it really is making a difference.”
 
Referencing the GAO report that Krugman cited, Matt added:
A new report released Thursday by the Government Accountability Office confirms that America’s most underrated law, the Dodd-Frank Wall Street Reform and Consumer Protection Act, is working and making a real difference. In this case, “working” means reducing market perceptions that the largest banks will receive special subsidies from the government in the event of trouble, and therefore reducing the advantages those banks enjoy during normal times.
 

Financial Industry and Financial Reform

Wall Street reforms showing signs of success

Updated