On paper, the proposed new curbs on the finan cial industry that were hammered out in the wee hours of Friday morning by Congress look so simple, so neat.
Smack around Wall Street and the banks, make them pay for transgressions, and suddenly the mess in our financial system will be cleaned up.
Let’s hope that is how it works out.
But once the changes are passed by Congress and signed by the president — which could happen in days — the country could find that instead of financial reform, it has instead passed the Law of Unintended Consequences.
It has taken so many months to get to this point that most people have turned their focus to other things.
But while we were looking at stuff like oil spills in the Gulf, a weakening housing market and disallowed goals in the World Cup, Congress was plodding along in its quest to make the world a safer place for money.
Under the proposed new rules, banks and their brethren, the brokerage firms, would be limited in some of the things they could do and, voila, the riskiness of the financial system is suddenly supposed to diminish.
Wall Street firms would have to spin off some of their complicated swap operations that few people — and certainly not the members of Congress making these new regulations — understand.
They’d be able to undertake investment hedges only when needed for their own business purposes — something that sounds pretty open for interpretation to me.
Banks wouldn’t be able to do trading for their own accounts, a prohibition that is intended to reduce their risks but unfortunately will also curb profits.
Big banks would also be prohibited from getting into bed with private equity firms and hedge funds — essentially the fast-money crowd on Wall Street.
In other words, Papa Washington will be limiting whom the kids on Wall Street will be allowed to play with. The financial industry has been naughty, Washington is saying, and it needs to be punished.
And just to make sure that the punishment sticks, Congress will create a consumer watchdog agency that will do what no consumer watchdog has ever been able to do before — catch wrongdoing before it gets out of control.
Plus, if one of these financial institutions does go blooey, there will be what has been described as a “death panel” that’ll help with the “orderly liquidation” of the company.
Boy, oh, boy, it sounds nirvanic.
The trouble with all this is that Wall Street and the banking industry are clever and quick moving.
While it is taking Washington an eternity just to find out what went wrong during the financial crisis, the clever money boys on Wall Street are probably already developing new ideas for getting around the new regulations.
Back to my child/parent analogy: No sooner have you punished a child for misbehaving than he’s thinking up new things that he shouldn’t be doing. The parent just can’t keep up.
When you consider how much money there is to be made whenever Wall Street and banks can find a new financial product, whether or not it is a Death Star in disguise, Washington just won’t be able to keep up.
So what are some of the unintended consequences of these entirely reasonable and completely necessary new restraints on Wall Street?
At the very least, banks will start charging more for services they provide to customers in an effort to make up for profits lost because of the new regulations. And we could even see higher interest rates on things like home and car loans.
And, of course, there is also the issue of jobs.
The Obama administration wants nothing more right now than to see the economy creating work for people who are unemployed. But crimping the profits of a huge industry like financial services will probably do the opposite.
What Washington is doing — even if you believe, like I do, that reform is necessary — just isn’t simple.