A financial fix, but for better or worse?

In the name of avoiding another catastrophic financial crisis, Congress and the Obama administration have crafted a new law thousands of pages in length and dealing with every nook and cranny of the banking business.

But the financial-system meltdown had one root cause, and by now we all know what it was: Too many people, businesses and governments took on too much debt over nearly 30 years. Resolution of that debt remains the slow-motion crisis that threatens the health of the financial system and the economy.

The reform bill obviously doesn’t make troubled loans go away. There are millions of mortgages, for example, that are larger than the value of the homes they secure.

Meanwhile, there is a risk that the bill’s new restrictions and oversight of banks could make lenders less willing or able to extend new credit to borrowers who have productive uses for the money, and can afford it.

That could leave the economy with two debt problems: too much bad credit, and not enough new good credit to grease the wheels of production and consumption.

The American Bankers Assn. wasted no time on Friday attacking the bill and predicting painful fallout on Main Street.

Major and minor provisions in the legislation “will have a very negative impact on traditional banks, on consumers and on the broader economy,” said Edward Yingling, president of the bankers group. “Loans are going to be harder to get and more expensive,” he said, as banks deal with a wave of increased regulation, including new reporting requirements on small-business lending and restrictions on fees.

Although the group may be overreacting for effect, the bankers’ concerns probably aren’t entirely bogus. Any legislation this sweeping is going to have unintended consequences. It’s only a matter of degree.

Meanwhile, consumer advocates almost universally have hailed the bill. They believe it will restore the financial system’s health by restraining the kind of speculative abuses epitomized by the subprime mortgage debacle.

By limiting big banks’ ability to essentially use federally insured deposits for risky securities trading, for example, the bill partly restores some of the safeguards in place before 1999, when the Depression-era Glass-Steagall Act was repealed.

“To a large degree this legislation revives old ideas that were foolishly dismantled,” said Damon Silvers, general counsel at the AFL-CIO in Washington.