By James Kwak

A number of people have asked me what I think about the financial reform bill that was finally passed by the Senate. I don’t think I have much to add to what I’ve said already, but here’s one more angle.

“We can’t legislate wisdom or passion. We can’t legislate competency. All we can do is create the structures and hope that good people will be appointed who will attract other good people.”

That’s what Christopher Dodd said about the bill, as quoted by The New York Times. It’s become a commonplace observation by now that the reform bill, instead of making structural changes to the financial sector, instead increases regulators’ discretionary powers to constrain — or not constrain — the behavior of the industry.

As a result, the success of reform, in the words of its supposed architect, depends on hoping that presidents will appoint good people and that that will be enough to attract people to being regulators.

Senator Dodd should already know how that works out. After all, he was in the Senate when George W. Bush appointed John Dugan, James Gilleran, and Christopher Cox to head the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Securities and Exchange Commission, respectively. And we already know what the Republicans think of financial regulation, given their overwhelming resistance to reform.

We can expect a little better from the Obama administration, which did appoint Gary Gensler to head the CFTC and still might do the obvious thing and appoint Elizabeth Warren to head the new Consumer Financial Protection Board. But still, hoping for a few good people–and hoping that presidents will find and appoint those good people–isn’t much of a strategy.

The underlying problem is that the bill doesn’t do anything to change the basic balance of power between Wall Street and Washington, which is partly based on the fact that it’s a lot better to be a banker than to be a regulator, and the only reason to be a regulator (if you believe in free-market incentives) is so you can then become a banker. As Bill Gross, king of the bond market and no one’s populist, said to The Wall Street Journal, “Wall Street still owns Washington. Better to have appointed [Former Federal Reserve Chairman Paul] Volcker ‘Dictator-In-Chief’ than to have let the lobbyists dilute what needed to be done.” (Scroll to the bottom and click through the experts in the “Grading the Bill” feature; thanks to Larry Doyle for finding the link.) So we’re left with hope.

Yes, I’m still sticking to my position that the bill is better than nothing. The alternative was sticking with the environment that gave us a bloated, predatory financial system and the financial crisis. But it’s still a missed opportunity.  And over the next couple years, as regulators (lobbyists) write the rules necessary to implement the bill, we’ll find out if anything really has changed.

By Simon Johnson

It’s one thing to block Elizabeth Warren from heading the new Consumer Financial Protection Bureau.

It’s quite another thing to deny in public, for the record, that any such blocking is going on (e.g., see this report; Michael Barr apparently said something quite similar today).

There is a strong groundswell of opinion on this issue from the left – see the BoldProgressives petition.  But the center also feels strongly that, given everything Treasury has said and done over the past few months, it would be a complete travesty not to put the strongest possible regulator in change of protecting consumers.  (SeeTed Kaufman on the NYT’s DealBook, giving appropriate credit to the SEC, and apply the same points to broader customer issues going forward.)

This can now go only one of two ways.

1. Elizabeth Warren gets the job.  Bridges are mended and the White House regains some political capital.  Secretary Geithner is weakened slightly but he’ll recover.
2. Someone else gets the job, despite Treasury’s claims that Elizabeth Warren was not blocked.  The deception in this scenario would be nauseating – and completely blatant.  “Everyone was considered on their merits” and “the best candidate won” will convince who exactly?

Despite the growing public reaction, outcome #2 is the most likely and the White House needs to understand this, plain and clear – there will be complete and utter revulsion at its handling of financial regulatory reform both on this specific issue and much more broadly.  The administration’s position in this area is already weak, its achievements remain minimal, its speaking points are lame, and the patience of even well-inclined people is wearing thin.

Failing to appoint Elizabeth Warren would be the straw that breaks the camel’s back.  It will go down in the history books as a turning point – downwards – for this administration.