22 Sep 2009
The Case for Regulatory Reformby Roger ThompsonTopics:
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 want 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.