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Banking on Disaster

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Goldman Sachs's announcement that it will pay 2009 bonuses for its top executives in stock should be met with a collective yawn. But not because these executives were already set to be compensated mostly in stock or even because the outsized profits the firm will make this year are creations of the federal government. Goldman's move is no more than a delay tactic: the foaming populists, they know, won't be able to keep up their anti-banker fervor for much longer, particularly once the economy begins humming again.

The same is true of Great Britain's 50 percent tax on bonuses. As Felix Salmon and others have pointed out, the initial flurry of panicked e-mails from bankers requesting relocation to New York City to avoid the tax will cease once cooler minds remind them that next year things will be different. There will be no energy for such an extraordinary tax next year, especially with the likely arrival of David Cameron at 10 Downing Street.

Next year, the next five years, and beyond are what really matter. The financial reform bill that the House passed today is meant to prevent a financial crisis from gripping the country again and, failing this, to ensure that taxpayer dollars are not used to save a tanking financial firm. The bill largely accomplishes this with a Financial Services Oversight Council to monitor financial stability and newly created dissolution authority to wind down troubled firms whose failure would infect the larger financial sector and economy. Though the legislation does quite comically mandate that taxpayer dollars be used in extreme situations only if regulators are "99 percent" certain that taxpayers will be repaid. Quite a legal standard.

What is particularly worrisome, however, is that the financial reform bill codifies into law a financial system that will always be on the brink of destruction. Monitors of financial firms and activities for stability and the risks they pose are certainly welcome. But the lesson of the financial crisis is that we should be asking what social benefits the financial sector can and should provide and how we can help it provide those benefits. Instead of regulators poking around for financial instruments that will lead the country to the brink of disaster, why not empower them to consider the value that the instrument adds to the economy and society at large? This, I suspect, would begin to neuter the financial sector of its overgrown profits and influence.

In fact, the financial reform legislation initially included such a provision. As originally designed, the Consumer Financial Protection Agency, which will regulate financial products and services available to and used by consumers, was to prescribe standards for "vanilla" products to create a sort of gold standard for things like credit cards and mortgages. In this way, the CFPA would consider the value of the product for the consumer, not simply the likelihood that a certain type of mortgage would bring financial ruin.

The Consumer Financial Protection Agency is a great accomplishment for consumer advocates. But the financial reform bill has not done enough to make the financial sector work for the real economy and for ordinary Americans. We continue to bet only on staving off disaster.