Now that we have new financial regulations...

While traveling in the first part of the month, Congress finally passed a financial regulation bill.  Clocking in at 2319 pages, the bill creates a new consumer protection agency, regulates derivatives, and expands the regulatory powers of the Fed.  Many details remain to be worked out, as regulatory agencies work out the details.

What impact will the new regulations have?  At the most basic supply-and-demand level, we should expect higher costs for all of the institutions being regulated which will translate into higher prices for customers of financial services.  For instance, free checking and generous reward programs on credit cards may become increasingly rare (hint: cash out your reward balances now).  No one has any real idea about the impact on derivative markets, including those in commodities that are far removed from the crisis. Will the regulatory costs mean some will no longer be able to afford to hedge their positions, or will increased transparency lower markups and make derivatives cheaper?

Many of us would be willing to put up with these costs if there was some assurance that the regulations will prevent a replay of the fall 2008 crisis.  Color me dubious.  The Fed is committed to zero interest rates as far as the eye can see.  The bill does nothing about Fannie and Freddie.  Even though we had no small number of regulatory agencies before the crisis, they all missed the boat -- do we really expect the new team to work wonders?  For further skeptical views, see this WSJ column by Stanford professor John Taylor and this blog posting by Nobel laureate and Chicago professor Gary Becker.