Banking Crisis May Return for Encore, Santa Cruz’s Dooley Says: Tom Keene
The U.S. banking crisis may repeat itself as the turmoil of 2008 fades and partisanship divides lawmakers, according to the University of California Santa Cruz’s Michael Dooley.
While the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 is “far-reaching,” Dooley said he has doubts about how well it will be put into effect. The reforms for the financial industry are very complicated and contradictory in some places, he said.
“The cynical view is that we will swing pretty hard toward enforcing the regulations, but we will again forget over a five- to 10-year time period, and this will happen again,” Dooley, an economics professor and the head of research at Cabezon Capital Management in San Francisco, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “That’s a reasonable bet.”
The reform law was spurred by the crisis that triggered the collapse of Lehman Brothers Holdings Inc. and dragged down Wall Street and the U.S. economy. In response, Congress approved $700 billion in aid for banks. President Barack Obama signed the Dodd-Frank measure in July 2010, vowing the new rules will end taxpayer bailouts of financial companies.
Since then, the Standard & Poor’s 500 Index (SPX) has risen more than 20 percent. In comparison, the gauge’s financial sector has advanced 1.4 percent.
The most effective way for financial institutions to maximize profits is through leverage, which eventually leads to trouble, Dooley said. The idea of eliminating leverage sounds simple, but quickly becomes a question of “good accounting and supervision,” he said. It isn’t a “cooperative game,” the professor said.
‘You Accept Limits’
“The general principle is quite clear: If you get government protection, you accept limits on your behavior,” Dooley said. “We just have to make sure we spend the money and train the people to enforce the rules.”
Dooley said he understood public outrage at the government rescue of financial companies after the crisis.
“The Congress, to be blunt, in return for financial support, weakened the regulatory structure of the U.S. to the extent they were able to do whatever they wanted to do,” Dooley said of banks before the crisis. “They made some bad choices, and it cost us a lot. It doesn’t surprise me at all that people are angry with the lack of supervision of the financial system.”
To contact the reporters on this story: Austen Sherman in New York at asherman18@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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