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Commentary: PBS Nightly Business Report

Prof. Peter Morici - 5/9/2010

Financial reforms moving through Congress won’t save us from paying for another banking crisis. The Federal Reserve has put the kibosh on abusive mortgages. But, the proposed Consumer Protection Agency would bend to populist sentiments for easy credit and lean on banks to create new questionable loans. So much focus is on derivatives that insure mortgage backed securities but it was those instruments, not derivatives that first instigated the crisis.

Before the crisis, Treasury and other agencies knew about structured investment vehicles where the banks park mortgage-backed securities, but saw no danger.

A Systemic Risk Council, headed by Treasury, can’t make regulators clairvoyant.

The Goldman Sachs hearings in the Senate were great theater, but little in the new regulations will stop Wall Street from creating new weapons of mass destruction.

Resolution authority to breakup big failing financial firms is also a non solution.

In the recent crisis, Treasury found it impossible to sell off the good pieces of Citigroup and AIG to quickly get back taxpayers money. But selling off good pieces is exactly what resolution authority requires.

Real reform would separate banks from the Wall Street casinos and cut the biggest banks down to size.

Neither Republicans nor Democrats have stomach for that.

Instead, Congress rearranges the chairs on the deck of the Titanic.