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Editorial: Financial Regulations Still Not in Place

As this week’s meeting between Upper Valley farmers and representatives of the U.S. Food and Drug Administration demonstrated, writing safety rules is by no means easy. In the case of agriculture, the complexity is reflected in the fact that what might make perfect sense for a corporate mega-farm out West could threaten the very livelihood of an organic vegetable farmer in New England. Accommodations for the scale of an enterprise are not something easily achieved in a regulatory regimen.

But despite the degree of difficulty, it shouldn’t be impossible to put into place sensible regulations. Thus, the failure of financial regulators to fully implement important rules designed to prevent another near-collapse of the financial system is disappointing and unacceptable. After all, the fifth anniversary of the meltdown that led to the Great Recession is fast approaching, and the Dodd-Frank act, aimed at overhauling the financial system, was passed by Congress in 2010.

President Obama met privately with top regulators earlier this week in an effort to impart a sense of urgency to their efforts, which, not surprisingly, have been impeded by lobbyists for the big banks. The New York Times reports that among the rules not yet in place are those intended to enhance prudential standards for banks and certain other financial institutions; capital and margin rules for derivatives; and the so-called Volcker Rule, which would prohibit banks from certain kinds of speculative investments.

The failure to implement these rules, critics say, means that “too big to fail” banks still pose existential dangers to the economy and would still have to be rescued by the government. As Treasury Secretary Jacob Lew said in a speech last month, “If we get to the end of the year, and cannot, with an honest straight face, say that we’ve ended ‘too big to fail,’ we’re going to have to look at other options.”

Fortunately, other legislative options do exist, partly because ending “too big to fail” is one of the few things in Washington that has any degree of bipartisan support. One bill, introduced by Sens. David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat, would require the nation’s biggest banks to carry more capital, reducing the risk that they would need to be bailed out by the taxpayers. That is a sensible step and one that stands a chance of enactment.

Less likely to succeed, but perhaps more effective, is one proposed by several senators, including Elizabeth Warren, a Massachusetts Democrat. They advocate rebuilding the wall between commercial and investment banking that was erected during the Depression and ill-advisedly torn down during the Clinton years.

That could have the effect of breaking up the largest Wall Street firms, which are so big and so complex that regulating them effectively in their current form is exceedingly difficult, as is holding their top executives accountable through the legal system. Smaller, more manageable institutions would pose no threat to the overall economy should they be in danger of failing.

Yes, we know that Wall Street brings to the table immense power in protecting its interests, but the American people, still suffering the ill effects of the last crisis, deserve to know that “too big to fail” is history.