Former secretary to the Treasury discusses crisis

Michael Barr, former assistant secretary of the Treasury and one of the main authors of the Dodd-Frank Reform Act of July 2010, spoke at the Wilson School yesterday about the financial crisis and the government reform that has since followed it.

Barr, who is now retired from public work, began by describing what he believed to be causes of the financial meltdown in 2008.

Barr specifically pointed to a lack of transparency, regulation and inadequate producer and consumer protections as causes for what he considered “the worst economic crisis since the Great Depression.”

“In my view the crisis was rooted in many years of unconstrained excess ... on Wall Street and in major global financial capitals,” he said. “The crisis made painfully clear what we should have in my view always known: that finance can’t be left to regulate itself.”

Barr criticized competition in consumer markets as being based on “tricks and traps” rather than on “price and equality.” He repeatedly stressed the importance of regulation and transparency, saying, “financial markets function best when there are clear rules.”

He then defended the Dodd-Frank Act as a “strong foundation” for a financially stable future. The act, he said, provides “authority for clear, strong and consolidated supervision and regulation by the federal reserve of any firm, regardless of its legal form” as well as “enforcement tools to go after manipulation, fraud and abuse.”

“The act provides for prudential regulation of the dealers and major players in these markets, so that adequate capitol-business conduct rules ... will apply to all participants,” he said.

He also explained how the legislation limits the risk that a single financial institution’s failure would cause system-wide failure.

“Under the Orderly Liquidation Authority established in the Act, the FDIC is provided with the tools to wind down a major financial firm on the brink of failure,” he said. “Shareholders and other providers of regulatory capitol to the form will be forced to absorb losses.”

But Barr said he recognized that the Act had no way of being entirely effective without international cooperation. He then discussed Basel III, a new global regulatory initiative that would cause “a significant increase in firm requirements” and “further emphasize that firms must internalize the cost of their behavior.”

During the Q&A session that followed the lecture, Barr spoke about the partisan politics he witnessed while working on the Dodd-Frank Act.

“There were a number of quite active members of the Republican caucus on the legislation whose ideas we incorporated in the bill who ultimately didn’t vote for the bill ... because their caucus politics would not permit it,” he said.

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He also addressed the concern that stricter regulations would stifle innovation in the financial sector.

The new regulation would not discourage creativity, he said, but would ensure that it became “less likely that the risk you are generating through that innovation would be pushed to somebody instead of absorbed by you.”

Michael Barr is currently a professor of law at the University of Michigan Law School and a senior fellow at both the Center for American Progress and the Brookings Institution. His lecture, entitled “The Financial Crisis and the Path of Reform,” was sponsored by the Program in Law and Public Affairs at the Wilson School.