The Case for Regulatory Reform
This is week when the Wall Street chickens come home to roost. In the wake of the worst financial crisis since the Great Depression, the Obama administration has sent Congress a package of regulatory reforms aimed, in large part, at putting an end to what HBS professor David Moss calls “implicit guarantees” that compel the government to bail out large financial institutions. Moss’s own reform ideas have helped frame the ongoing Washington debate and make a clear, persuasive argument for more federal regulation of financial markets.
If you don’t wan to get bogged down in details, read the overview by Treasury Secretary Timothy Geithner and Lawrence Summers, director of the National Economic Council, in the June 15 Washington Post. Among other things, the proposed reforms will raise capital and liquidity requirements for all financial institutions, subject all derivatives to regulation, and create a mechanism for dismantling failing financial institutions.
In short, the administration is staking future financial stability on a much larger regulatory role for government, an approach advocated by Moss. “Government is a necessary and powerful entity for helping us solve some of these problems,” says Moss. But grumbling from some conservatives about creeping socialism, the administration is not interested in supplanting private markets, Summers declared in a recent speech. President Obama has been clear on two key points, said Summers:
- The first is an unequivocal recognition that we only act when necessary to avert unacceptable — and in some cases dire — outcomes.
- The second… is that any intervention go with, rather than against, the grain of the market system. Our objective is not to supplant or replace markets. Rather, the objective is to save them from their own excesses and improve our market-based system going forward.
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Your Comments
If it is "too big to fail", it is "too big"! For those financial entities so designated, we should enforce the Sherman Antitrust Act. These companies are obviously too big and too complex to manage, and the greed factor is too alluring. They should be broken down into smaller entities that can be allowed to fail.
The government could not even find the $50 billion fraud of Bernie Maduff until he confessed. Allen Stafford bought off both Democrats and Republicans plus the government of Antigua in pulling off his $8 billion scam, and still the SEC and the FBI were over ten years late bringing him in, and then only after the 2008 financial crash!
Okay, realign the rules, but break the usual suspects down into "free to fail" size entities...Bank of America, Citibank, AIG, Freddie Mac and Fanny Mae would be good places to start.
While you are at it, please do not give the Feds any more power....they have missed it every time and have been part of the problem in every major crash.
Also, such action would require that our Washington representatives make more calls to pick up their re elections checks. That, too, would not be a bad result.
There are many problems with betting the ranch on improved industry regulation. In the Post interview, Geithner points out that regulatory agencies fell two steps behind the financial engineers, and that was a major cause of the 2009 recession. (No one would argue with that assessment.) However, Geithner blindly thinks that he can fix this by revamping regulation and training better regulators.
I am not sure Geithner will be successful. The financial engineers on Wall Street get paid too much money to stay three steps ahead of their respective industry regulator who is making 1/100th of his Wall Street counterpart.
I am worried this is not a viable solution.
Looking to 'industry regulation' as the panacea for the ills of our financial system is a dangerous path to go down.
Sec. Geithner's contention that by tightening controls and improving the training of regulators is a band-aid solution at best. in my opinion. In my experience, many regulators are just biding their time by working in government while such time comes that they can make the switch to the "corporate" world.
Karl's earlier comment that regulators are outnumbered and dare I say 'outwitted' by Wall St. financial engineers is absolutely spot on. If this is Secretary Geithner's plan to 'fix' the system then I too am worried.
In my current role of helping mid-market companies with buying or selling a business I too often encounter individuals that are very willing (and able) to 'game' the system. I unfortunately don't think that increasing the training or amount of regulars will be the fix we're all hoping for.
The obvious lesson is the public purse is now an extension of private, powerful, interests. To some degree this has always been the case. The acceleration of this momentum-post the end of the global ideological struggle in 1990-has now been made manifest by the economic crisis; with the vast sums corporate elites directed to private individuals being made good with borrowed money that all Americans are liable for. The relative ease with which this has been accomplished-given the staggering sums involved-is the abiding lesson Wall Street is now digesting. Without an equal and opposite reaction, it will no doubt leverage its appropriation of the public purse still further.