Financial Bill Designed To Handle, Not Prevent, Crisis
GUY RAZ, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.
Sometime around the end of last summer, economists said the recession was over. But long-term unemployment is higher than it's been since the Great Depression and growth is slowing. Add to that, the dramatic declines on Wall Street this past few weeks. And you may be forgiven for asking: Is it really over? We'll hear one economist's answer to that question in a moment.
But first to financial regulation. With the passage of the Senate finance bill this week, Congress looks set to adopt the biggest regulatory changes to the financial industry since the 1930s. Those rules are designed, in theory, to prevent another collapse like the kind we saw in 2008. But what does it mean for the rest of us?
We begin with NPR's Audie Cornish.
AUDIE CORNISH: First of all, we're going to get a new regulator in the form of this consumer financial protection bureau or agency. So far, we've only had banking regulators, so they didn't know what to do with mortgage lenders who aren't banks or an AIG, which sold insurance, but also did some betting and other kinds of risky trades on the side.
RAZ: They were focused on the big guys, not on the consumers.
CORNISH: Yeah, exactly. So you're going to have a consumer-oriented bureau, which is going to watch over all the lending that's, you know, in your file cabinet at home, your checkbook and your student loan and your mortgage. All that paperwork is going to be watched by someone.
And then the regulators themselves, as a whole, will now be tasked with watching over the entire system to monitor for big sort of seismic shifts or changes. Is everyone starting to trade in one kind of thing and what's that thing made up of? And the idea is that once they get a sense of what's going on, they can drill down and maybe address the problem.
RAZ: What does it mean for the average consumer? Will it mean that, you know, mortgage paperwork will be easier? Will it mean that our credit card fees will go down? What does it mean for people, you know, like us?
CORNISH: Well, the Republicans who oppose the bill would probably say regulation never makes anything easier. So, if you can think about it that way, you're going to have an agency now who is going to be looking at that mortgage. And if it's an adjustable rate mortgage or a subprime mortgage for someone who doesn't have great credit, things are going to be a lot more stringent. You won't be able to get a loan without really showing evidence you can pay for that loan. We just come out of a few years where you didn't have to do that.
RAZ: How would something like the regulation of financial derivatives affect consumers? That's also in - a provision in there.
CORNISH: It's a huge part of the bill and it's actually the most contentious part of the bill because it's a big unregulated market, basically, bankers or investors or even farmers or airlines. They can call up banks and say, I think the price of oil is going to go down or up, I'm gonna put some money down against that to protect me from when that price change happens.
The problem is during the loan crisis, people were doing that with loans, bundled packages of loans, which are called mortgage-backed securities. So they were betting on whether these things would go up or down. They were betting on whether or not you were going to pay off your mortgage.
And when a bunch of people didn't, that's when we saw the crisis and we saw a company like AIG, the insurance firm who have been dabbling in this kind of trading, fall apart.
RAZ: So in theory, this is going to prevent that from happening?
CORNISH: It's going to set up a way to see further down the horizon if something like that...
CORNISH: ...is coming up, a little bit like a tornado, though. I mean, I think...
CORNISH: ...that's the way it's supposed to be, to be able to look out on the planes and say, that doesn't look right, what's coming down.
I mean, the thing to understand about this bill is repeatedly, we heard the author, Chris Dodd, the head of the Banking Committee, say, this is not going to prevent the next crisis. That's not the promise here. The promise is we will be able to handle the next crisis. Before, it was ad hoc.
CORNISH: You're gonna have Ben Bernanke and Hank Paulson kind of in rooms, making phone calls. This is going to make a system so that you don't have regulators going to lawmakers in the middle of the night and asking for $700 billion.
RAZ: That's NPR's Audie Cornish.
Audie, thanks so much.
CORNISH: Thank you.