5 Years On, Banking Regulations Made Things Better—And Worse

Editor's note: A version of this post originally appeared on LinkedIn.

Five years ago this month the financial crisis arrived with all the finesse of a flurry of punches to the gut. One of my most vivid memories came as Lehman was being given up for dead. Fear was everywhere. I recall calling up the stocks of financial stalwarts Goldman Sachs and Morgan Stanley on afternoon to discover they were each down in the range of 20-plus percent – for the day.

It looked and felt like the financial industry was in full meltdown mode and nothing would stop it. Shell shocked, I walked out of my office at Forbes in Greenwich Village, ran into a friend in the fourth floor newsroom and began mulling whether the second Great Depression had arrived. It was very scary stuff.

Five years on, I recall the episode with the queasy fell of a nasty nightmare that left me and my pillow soaked in sweat. A ton of ink has been spilled in the meantime about who and what was to blame for the crisis. Another ton has gone into Washington's political and regulatory response.

It's notable that five years on, American Banker today and tomorrow assembles for our third annual Regulation & Reform conference in Washington. Our D.C. bureau chief, Rob Blackwell, and his crew deserve much credit for pulling together the event (Twitter hash tag #Regulatory13), which will include remarks from FDIC boss Marty Gruenberg, Consumer Financial Protection Bureau boss Richard Cordray, Comptroller of the Currency Tom Curry, Sen. Bob Corker, co-author of a bill that aims to reform housing finance, and many other bankers and bank-policy big-wigs.

There's no question that that banking industry owes a solid to government policymakers for bailing them out of the crisis and staving off what could have been an even worse result.

What's still much in dispute is whether the Dodd-Frank Act and the various other salves that have been applied to stave off another calamity will work as intended or merely gum up the cogs of our financial system—or both.

My guess is that a decade or two from now the result will look pretty disappointing. Unfortunately for us Americans, the nation's capital excels at expanding the bureaucratic industrial complex. Our mammoth tax code has gotten bigger by the year (I once wrote a story about its 200 pages merely on taking money out of your Individual Retirement Account!). Nobody's arguing that the code's made the system fairer.

Similarly, in banking, as my colleague Barbara Rehm wrote recently:

"There have been 13,789 pages of rules – more than 15 million words – written by more than 10 agencies…But the depressing thing is, five years on, Dodd-Frank is only 40% complete. Just extrapolating from what's been done to date, we've still got more than 20,000 pages of rules to come."

In many areas, including getting taxpayers off the hook for Wall Street's casino-like gambling, the Volcker Rule's progress has been slow. With housing, there's lots of talk about reinstating market discipline but little hope that it'll actually happen with all else that's going on this year. Or with next year's mid-term election.

In some respects, all this leaves us on the worst of all possible worlds. More regulation than anyone can read, much less comply with or enforce. Meanwhile, our biggest banks have grown bigger than ever while the community banks that provide a critical source of small-business credit continue to decline in number. Taxpayer money still pours into subsidizing home builders and homeowners through our mortgage interest exemption and numerous other avenues. And our Federal Reserve is still printing dollars in ways whose results are unknown and unknowable.

So yes, things feel much more stable today than they did five years ago. But as Hyman Minsky warned, it's when markets feel their most stable that the greatest dangers lurk. Our reg conference participants will have lots to talk about.

Neil Weinberg is the editor in chief of American Banker. The views expressed are his own.