Regulating Wall Street: Exploring the Political Economy of the Possible

Abstract

The Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 is the most ambitious measure aimed at regulating U.S. financial markets since the Glass-Steagall Act was implemented in the midst of the 1930s Depression.  However, it remains an open question as to whether Dodd-Frank is capable of controlling the wide variety of hyper-speculative practices that produced the near total global financial collapse of 2008-09.  This is because the legislation mainly lays out a broad framework for a new financial regulatory system.  It leaves the details of implementation to ten different regulatory bodies in the U.S.  The lack of specificity in setting down new financial regulations was widely viewed as a victory for Wall Street, and equally, a defeat for proponents of a strong new regulatory system.

It is clear that Wall Street is moving into the phase of regulatory rulemaking with a strong hand.   However, it is still the case that dominance by Wall Street in implementing Dodd-Frank is not a foregone conclusion.  Rather, Dodd-Frank remains a contested terrain—supporters of financial regulation can still achieve significant victories within the regulatory framework created by Dodd-Frank.  The focus of this paper is to explore three central areas of Dodd-Frank where we think effective regulations can be established.  These are 1) proprietary trading by banks and other financial institutions, 2) oversight of credit rating agencies such as Moody’s and Standard & Poors’ and 3)  the markets for commodities futures derivative contracts.  In each of these areas, we address the question:  under what conditions are some of the basic features of Dodd-Frank capable of succeeding in controlling hyper-speculation and promoting financial stability?