Politics, as hopeful men practice it in the world, consists mainly of the delusion that a change in form is a change in substance.
--H. L. Mencken
--Lyndon Johnson
WHEN Treasury Secretary Timothy Geithner first promised that fundamental financial reform was coming, Wall Street held its breath. With his testimony to Congress last week, you could almost hear the sigh of relief.
Yes, there may be an agency with oversight of the entire financial system (most likely candidate is the Federal Reserve) to make sure there aren't major risks that might otherwise slip through the current, disjointed regulatory screens. Yes, Mr. Geithner proposed extending some form of oversight to previously unregulated derivatives, hedge funds, and private equity firms, the major players in the so-called "shadow banking system."
And yes, there's going to be a push for more international cooperation to block some countries from trying to attract major financial firms by offering weaker regulation.
There's also been a lot of tongue-in-cheek, public moaning and groaning by "masters of the universe" about Mr. Geithner's so-far half-hearted measures to shrink their sky-high compensation to mountain-high levels.
Proposals to reduce pay packages should be more than window dressing to assuage an outraged public. Reforms are needed to reward financial managers based on longer-term profitability, rather than the "take the money and run" attitude that's fostered risky industry practices.
But these and other recommendations he made (with more details due in several weeks) won't change the financial world drastically. What's more, they don't address some root causes of the present crisis: adjustable rate mortgages that precipitated the debacle when they reset, and securitization, the bundling of poor quality home, auto, credit card, and other debt into overrated bonds for sale around the world.
There are a couple of reasons Mr. Geithner's recommendations are something less than game-changing.
First, Treasury needs the help of private investors and the shadow-banking world for the proposed public-private investment partnerships that are supposed to buy toxic assets from banks. This centerpiece of the financial recovery plan requires cooperation from the financial world that you're not likely to get if you beat participants over the head with stringent regulations that basically alter the way they do business.
For example, proposed registration of large hedge funds with the SEC is not the sort of Draconian measure that would alienate these folks. As a matter of fact, it's already been grudgingly accepted by industry representatives as the least onerous regulation they could expect under current circumstances.
Second, there's the problem of getting any changes through Congress. While financial system bailout legislation moved very quickly despite the cost in hundreds of billions (trillions, when government guarantees are included), reform promises to be a slow, hard slog. There are so many competing interests needing to reach compromises that it will be something of a miracle if we don't end up with ineffective, watered-down measures. New laws may look like they're effective but may not do much to correct the underlying problems that produced the crisis.
Finally, there are the regulatory agencies themselves. Turf battles have already begun among the SEC, the Commodity Futures Trading Commission, and the Federal Reserve. State insurance commissioners will no doubt be heard in response to Treasury's proposal for an "optional" federal insurance regulator.
With all these domestic forces jostling for position, we mustn't forget that the G20 countries' meeting is bringing additional parochial interests to influence the shape of any new global financial regulatory structure.
We can try and be optimistic, but unfortunately, inevitable compromises don't promise fundamental change. History tells us that form usually triumphs over substance, and new ideas slowly die in old bureaucracies.
Paul Metzger, formerly on the Federal Reserve Board's staff, was director of financial and legal studies at the University of Maryland's graduate school. His column appears on the first and third Fridays of the month. He can be reached at pmmva7@gmail .com.