Obama's financial reform package will not only fail to prevent another crisis, it could make another one more likely.
Writing in Fortune, William Black, an associate professor of economics and law at University of Missouri – Kansas City, says another crisis is likely because the legislation fails to fix greed. Perverse incentives and bonus schemes that created the meltdown are still in place. Indeed, the percentage of executive compensation tried to short-term reported income has increased since the crisis.
Black writes: "Over time, crises have gotten more severe because many reform policies have the unintended consequence of encouraging these types of incentive structures. Executive and professional compensation create the motives, while deregulation, desupervison, and regulatory "black holes" create the opportunity. Accounting is the CEO's "weapon of choice" that transforms the perverse incentive into what economists, regulators, and criminologists agree is a "sure thing" in crises (means). That's the classic recipe for disaster: motive, means, and opportunity. The bill does not address the problematic nature of modern executive and professional compensation even though the data shows that these are leading causes of the Great Recession … The underlying mortgages rested on multiple scams by professionals. The loan brokers and officers' bonuses led them to advise to file fraudulent applications and caused them to ensure that appraisers were picked that would inflate 'market values.' 'Independent professionals' were suborned in this manner well over a million times. Studies show that college students are frequently willing to cheat on tests and to refuse to report cheating by others. Why are economists unwilling to understand that these same people often continue to cheat as VPs and CEOs? They prosper because they cheat."
I examine the failings of the legislation in my column here.
It's unlikely to change anything because the banks are still too big and interconnected, the same regulators are in place with the same powers that they failed to use last time and not all derivatives have been brought out from the shadows. History tells us these crises keep happening. But next time around, it's going to be even more cataclysmic.
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