The financial reform bill is like a gigantic, half-completed connect-the-dots puzzle. The image is visible if you squint and make a few assumptions -- those must be Elizabeth Warren's spectacles -- but much remains unclear. Regulators, some of whom remain to be created by other regulators, will determine the ultimate clarity of the financial framework that results from the Dodd-Frank bill. The lesson that implementation often involves legislating is important and one that health care reform has demonstrated, as well.
This is a long way of saying, as many others have, that the financial reform bill is at once significant and indefinite.
It is dangerous, then, to speculate about the ultimate impact of the legislation. However, it is clear that the Dodd-Frank bill holds great potential for reversing some of the damage done to metropolitan areas by the mortgage crisis and for protecting cities from the predatory lending and other shady financial practices that weakened neighborhoods throughout the country.
First, the legislation will make it more difficult for Wall Street banks to defraud municipalities and other local governments. By strengthening oversight of the municipal securities industry and registering the advisers that push "innovative" financial products on local governments, the legislation will curb - though certainly not eliminate - the type of abuse that occurred in Birmingham, Alabama where financial innovators nearly bankrupted the city by selling it a "synthetic interest rate swap" to fund a new sewer system. Matt Taibbi describes the bankers at the center of these municipal securities schemes as:
[M]odern barbarians...These guys aren't number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive.
The Economist, describing a similar occurrence in Milan, was more staid: "One of the greatest advantages of financial innovation, it was often said, was that risk would end up going to those best qualified to hold it. In fact, much of it seems to have ended up in the hands of those least able to understand it."
The Dodd-Frank bill also includes additional funds for the Neighborhood Stabilization Program, a Bush-era policy that links neighborhood rehabilitation and redevelopment to the provision of affordable housing while ending the negative feedback loop that results when foreclosed homes are abandoned and property values fall, putting additional homes at risk of foreclosure. The funds are targeted to cities and metro areas most affected by the foreclosure crisis.
The elephant in the room, of course, is the Consumer Financial Protection Bureau which, if staffed with diligent regulators and imbued with a culture protective of consumer interests, could greatly influence the geography of metropolitan areas for years to come. By cracking down on unfair and abusive lending practices and expanding the information available to consumers taking out mortgages, the Bureau could become a force for smarter and more cost-effective development, a role reversal for a federal government that has always supported the cheap mortgages that make suburban sprawl possible.
There is much uncertainty surrounding the Dodd-Frank financial reform bill and its impact on cities suffers from the same ambiguity. New York's financial services sector, for example, will survive intact but its composition will likely evolve. However, the bill provides an opportunity for the federal government to reverse course and support the cities and metro areas that were made weaker by the housing crisis and an overgrown financial sector.