President Barack Obama signed a hefty financial reform bill this week the size of which has not been seen since the Great Depression. The bill is the result of a lengthy, yearlong effort by the Obama administration to create legislation to fix the problems on Wall Street that helped cause the 2008 market crash. Unfortunately, this bill addresses only one level of those problems and fails to address the core reason for our economic downturn. In the end, all it accomplishes is limiting banks’ ability to invest in risky assets. While this itself is a good thing, it is not, at heart, what caused the 2008 market crash.

The finance bill, according to Obama, “will help foster innovation, not hamper it.” So what does the bill seek to accomplish on Wall Street? “The law will give the government new authority to unwind failing financial firms that may threaten the entire system, impose new rules on derivatives markets and create a consumer-protection agency at the Federal Reserve to monitor everything from home loans to credit cards. “ writes Phil Mattingly and Patrick O’Connor for Bloomberg.

One way the bill will seek to improve conditions will be to limit banks from investing more than 3 percent of their capital in hedge funds or private-equity investments. Hedge funds are risky because they are unregulated and therefore able to invest in very high-risk assets, like collateralized debt obligations based on sub-prime mortgages. The realization by domestic and foreign investors that debt obligations such as these are of little value was one of the reasons for the 2008 collapse. However, not only should banks know the risks involved with hedge funds, but they should know to diversify away the risk. Hedge funds do have the potential of offering high yields, as evidenced by their increased risk. So what is the point of this particular aspect of the new law? Sure, the subprime crisis was realized (it actually existed much longer) when these poor investments were rated properly, but why were so many subprime mortgages made in the first place?

The Federal Housing and Urban Development housing goals regulated banks to give mortgages to lower income households, who could not afford them otherwise. Therefore, these individuals were motivated to obtain a 30-year mortgage rather than rent at a lower rate. These subprime mortgages were then packaged and sold as junk bonds. As time went on, a large number of these borrowers began to default.

Those who invested in the junk bonds, like banks, suffered losses.

Now, this financial reform bill seeks to solve the problem by simply stopping banks from investing in these high-risk assets. Wouldn’t the better solution be to fix what is causing such poor investment? To do that, first we need to drop incentives for people that buy homes who would otherwise rent. Then we need real job growth sparked by domestic manufacturing and less free trade. America needs to reduce the impact the housing market has on our overall economy.

Until we secure America’s economic future by re-achieving the ability to manufacture goods domestically and compete fairly in the international market, laws like the ones found in this financial reform bill will only succeed in veiling the problems our economy faces rather than eliminating them altogether. It makes for a nice political move, but in the end does nothing for the American economy or its people.

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