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Perhaps the most obvious sign: Long before the financial crisis hit, it was clear that the division between the Securities and Exchange Commission and the Commodities Futures Trading Commission was irrational, wasteful and an impediment to sensible regulation. But everyone knew that the setup represented a split of interests between the Chicago-based commodities exchanges and Wall Street. And the large interests intent on keeping derivatives deregulated -- mostly, but by no means exclusively, the big bank dealers -- were making big money and saw no reason to seek to change a dysfunctional arrangement. When the crisis hit, and cries for regulatory reform went up, the "easiest" task seemed to be to merge the two clearly failing regulators, the CFTC and SEC. Yeah right. According to Stephen Labaton's piece in Tuesday's New York Times, which confirms other reporting, that hasn't occurred and no one seems confident it will. The institutions themselves have promised to be nicer to each other and agreed on a scheme to oversee different parts of derivatives business, as if their earlier supervisory failings were simply a matter of institutional bickering, not regulatory capture. And the industry itself, in all its pieces, hasn't exactly demanded a single, integrated regulator. As a result, Treasury and Congress have stepped back on the issue. And Labaton, mirroring his Washington sources, seems already to be defining success downward. So the question needs to be asked: If something as rational as the merger of these two regulators can't be done, what can? Well, what about a more specific culprit, credit default swaps? Even folks who never bought a share of stock know CDSs created a huge mess; even Alan Greenspan has confessed that there was a "flaw" in his notion that the derivatives markets could self-police themselves. Then there's the complex, intense politics of CDSs, which we outlined in a post several weeks ago. Tuesday's Wall Street Journal has a nice piece tucked inside the C section that describes the infighting occurring between two private groups -- the big bank dealers and the large money managers -- over an industry response to Treasury. Instead of a united front, conflict has broken out, particularly over the number of CDS clearinghouses: Money managers want more, and greater competition, the dealers want the current IntercontinentalExchange Inc. (NYSE:ICE), which they own, to dominate. The result: charges of dissembling and oligopolistic behavior. Is this good or bad for sensible regulatory reform? Well, probably bad. Congress is going to act according to some sort of industry and Treasury consensus. But if the "industry" can't agree on fundamental points, does anyone really believe Congress will move aggressively to do the right thing? The CDS dispute also establishes the code word that will be bandied around to support lighter derivatives regulation: innovation. The fact is, as the economy improves, as we move from the fear and panic of last fall, cries of "innovation" and "efficiency" will appear increasingly virtuous. It will take a while longer for the "wisdom of markets" to re-emerge. You can push this further. Harvard historian Niall Ferguson, who has taken up economic punditry as a sideline, has been engaging Paul Krugman in a strange debate over macroeconomics that he then wrote up in a crowing column for the Financial Times last week. Ferguson argues that Krugman is discounting the probability of inflation by emphasizing the depression-like depths of the crisis. Instead, he argues, this is a recession not a depression, thus requiring different policies. Ferguson argues that Krugman and the Obama administration are playing with inflationary fire by engineering such large fiscal deficits. What is the connection of this "debate" between two of the more self-regarding pundits around, to the politics of regulatory reform? Well, as green shoots appear -- who knows if they're real or not -- Ferguson's notion of a recession, rather than a depression, takes on greater currency. It becomes easier to convince ourselves that we overstated the crisis, particularly as time passes. And it becomes easier to argue for going slow, acting incrementally, emphasizing innovation and efficiency, burying the sense that we suffered from a systemic crisis. In fact, you don't have to fully agree with either Krugman or Ferguson -- the pairing is a false dichotomy of views -- not to recall how close we came to the edge last year, and to understand the role irrational, dysfunctional and clueless regulation played in what occurred. But Congress, in particular, lives for the moment. And thus every day the Dow edges up, every mention of green shoots, or every quiver of consumer confidence, the opportunities for fundamentally reforming financial regulation ebb away. - Robert Teitelman See Ferguson's story from the Financial Times Robert Teitelman is the editor in chief of The Deal.
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This isn't the Great Depression. This isn't 1932. Maybe it will be, but without that vicious bite that a true depression provides, Congress apparently won't stir itself to rise above the usual politics and pass the kind of transformative regulatory scheme that so many pundits have chattered about. True, it's still early -- Treasury has just begun sending proposals up Pennsylvania Avenue -- and we could take another sickening descent into chaos, but all the evidence of incremental reform are there. 
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