The Dodd-Frank bill, the large financial regulatory reform bill that finally became law last year after a year of Congressional and Administration work, is being both implemented and changed. The implementation process is where the legislation will succeed or fail. For example, nothing in the bill definitively eliminates “too big to fail” for example, but it does allocate enough power that the implementation of the bill could be structured to limit the problem. Another example, here is a very nice report on how to implement the Volcker rule.
Actual changes in the legislation are more of a concern, because they can represent the success of industry lobbyists at rolling back regulations. The bill was passed under the spotlight brought by the crisis, and my concern is that useful pieces can be repealed by legislators (in exchange for cash) when the press and voters are paying less attention. While not as drastic as Congressional attempted revisions (and Judicial actual revisions) to the health care legislation, the revisions are starting to appear. As an example, the Bureau of Consumer Financial Protection is to be largely funded from revenues from the Federal Reserve, limiting congressional oversight. The Federal Reserve has a long and successful history of banking regulation (remember they did not have the authority to regulate the investment banks or AIG, they just helped clean up the mess!). Texas congressman Randy Neugebauer is trying to give Congress complete control of the purse strings (see here). Maybe this is helpful, in that Congress can respond to the needs of the voter (and democracy has some advantages). But institutions and institutional culture matters. The Fed has struck an awe-inspiring balance between responsiveness to industry and protection of the economy. And it would be great if we could construct some similar institution to regulate consumer finance.