Ask the Expert: Pat Garofalo on Financial Regulatory Reform

Why do we need financial regulation?

We need financial regulatory reform because right now the regulatory structure works really well for banks but not so well for everybody else. The incentives all push bankers to take really big risks, to trade complex instruments with the full knowledge that the federal government will be there to bail them out in the end when they fail.

What should be included in a final bill?

Right now the House and the Senate are going through what’s known as a conference committee, which reconciles the different versions of the bill that were passed by each chamber. When that’s done they will send the final product back to the House and the Senate for one final vote. There are three key parts that need to be in the final bill. First, is a strong consumer protection agency which will be tasked with policing consumer lending and looking out for consumers and protecting them from the banking industry’s excesses. Second is a strong resolution authority for taking apart failed financial firms without resorting to taxpayer bailouts. Third is strong, tight reform of the derivatives market. Right now the derivatives market is some $600 trillion and it’s almost completely dominated by five of the biggest banks in the country. Strong reform means that we take these instruments out of the dark, set clear rules of the road, and give both investors and regulators clear paths to follow and clear prices to follow so that banks aren’t able to use these things and resort to all sorts of financial shenanigans.

How will these provisions make our financial system stronger and safer?

These provisions will help build a stronger, stabler, fairer financial system by: first protecting consumers from the banking industry’s excesses and the sort of predatory loans that helped inflate the housing bubble; second by bringing the huge, complex derivatives market which helped lead to the failure of a lot of our big financial firms out of the dark, into the light with clear rules of the road; and third, keeping taxpayers out of the bailout business. No longer will a taxpayer have to pony up when a giant firm fails because the federal government will have both the tools, the laws and the mechanisms in place to take that firm apart, sell it off and keep taxpayer dollars out of it.