With disastrous economic events accumulating in March, President Barack Obama exhorted listeners during a weekly radio talk to "discover great opportunity in the midst of great crisis." It's an appealing conceit: seeking breakthrough achievement in a time of danger.
That's why it's such a shame we didn't take advantage of the Wall Street crisis of 2008 by making 2009 the Year of Real Financial Reform.
Instead, the Obama Administration offered half-measures. The financiers lobbied against even modest reforms, and a Congress drenched in Wall Street campaign cash has peppered proposed regulation with loopholes. At a conference in the U.K. on Dec. 8, Paul A. Volcker, the former chairman of the Federal Reserve and an Obama adviser, addressed an audience of bankers and executives who were insisting that Wall Street and big corporations can police themselves, without more government scrutiny. "Wake up, gentlemen," Volcker said, according to media reports. "Your response is inadequate."
The warning applies to regulators and politicians as well. The crisis of 2008 offered a once-in-a-lifetime opening to overhaul the U.S. financial engine. It's a machine that can do much good by raising and allotting capital and much damage when allowed to run unchecked. Now, as stock markets recover and bank earnings bounce back, mass amnesia has set in. Political momentum has waned. Financial reform legislation is getting weaker by the week. And Goldman Sachs Chief Executive Lloyd C. Blankfein says we should be grateful to investment bankers for "doing God's work."
The most fundamental failure has been the Administration's unwillingness to take seriously the murmurings of that shrewd old giant, Mr. Volcker, who wants to reverse course on bank gigantism. In the 1990s, Wall Street convinced both political parties that combining all manner of financial services into unfathomable Goliaths was necessary in a global economy. Poof went the safeguards instituted in the wake of the Great Depression separating the public-utility-like functions of the financial system—customer deposits, conventional commercial loans, and so on—and the casino of investment banking and high-stakes trading. The consolidation accelerated a race for hugeness that gave us institutions that are "too big to fail": basket cases like Citigroup (C) and risk factories like American International Group and Goldman. Without hundreds of billions of taxpayer rescue dollars flooding the markets, all of these firms, and many more, might have collapsed, bringing on Great Depression—The Sequel.
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