The reform bill that appears headed to enactment is designed to address problems that produced the 2008 financial crisis. A major premise behind the legislation seems to be that the crisis resulted in large part from regulators’ lack of adequate tools. Thus the bill provides the Securities and Exchange Commission, the primary regulator of mutual funds, and the Federal Reserve Board with even greater authority than they now possess. It also creates entirely new regulatory bodies such as the Consumer Financial Protection Bureau and the Financial Stability Oversight Council.

However, the record indicates that the key problem behind the financial crisis was not so much regulators’ lack of regulatory tools, but rather regulators’ refusal to utilize tools they possessed. Thus the SEC exempted asset-backed pools from regulation, repealed the uptick rule for short sales, and lessened capital standards for broker-dealers. Meanwhile, the Fed declined to crack down on unscrupulous subprime lending practices and refused to raise interest rates to dampen the housing bubble.

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