A Time for Financial Regulation


Photo credit: Obama-Biden Transition Project, licensed under creative commons

Originally published on January 28, 2009 at politicsunlocked.com

President Obama’s financial team, including Paul Volcker, Chairman of the Economic Advisory BoardTim Geithner, Treasury Secretary, Larry Summers, head of the National Economic Council and Austan Goolsbee, Advisory Board Economist, hit the ground running with a comprehensive plan for financial reform geared at filling holes in the existing regulatory system.

The plan is separate from the much discussed stimulus package before congress and provides no bailout, tax cuts or government spending to help the economy.  Yet this plan is a bold act of reasonable and necessary regulation designed to bring the government up to speed in its oversight of the financial industry.  

Against Abuses and Mismanagement, Not Free Markets

The plan calls for:

1. Increased oversight on the part of the Federal Reserve and regulatory agencies such as theSecurities and Exchange Commission.

2. Federal standards and scrutiny of insurance companies, mortgage brokers, hedge funds and credit rating agencies.

3. Oversight and listing or trading through a clearing house or exchange for derivatives and other financial instruments. 

4. Higher capitalization requirements for banks and large investment companies.  

The plan addresses specific concerns which led to some of the biggest financial scandals in history.  

Two points of focus are eliminating conflicts of interest which allowed financial rating agencies to profit from transactions with the institutions they themselves rated and limits on executive compensation for companies receiving federal bailout dollars.

Much of this regulation can be imposed by the executive branch, but some will require the passage of new legislation.  A general belief that significant failings in government oversight led to the current financial crisis is widely held, but even so, new legislation may run into opposition from those opposed to any and all government regulation of markets.  However, support for the proposed rules is coming from many corners of Washington, including Republican political circles.

The Group of 30, a respected committee of governmental and industry representatives, published a report on January 15th, 2009 calling for dramatic regulation and reform similar to the Obama administration plan.  This should be no surprise, as the commission was headed by Paul Volcker, a longtime Obama advisor prior to being named Chairman of his Economic Advisory Board.  Early reviews of the commission report and the administration’s plans are positive. 

Too Much Government Interference?
While there is a risk that new regulation will slow otherwise healthy investment and financial activity, something obviously needs to be done, and there are reasons to have faith in the proposals.  

The new administration’s economic team has a strong free-market philosophy.  The fact that these free-market economists are proposing stricter regulation is a testament to their certainty that the market is not able to correct itself.  The free reign of financial entities created layers of financial miscalculation and mismanagement which now threaten to collapse the entire economy.  

Those concerned that regulation of the financial industry is a move toward Socialism should rest assured that the regulations proposed are no bailout or nationalization.   These rules aim to stop financial mismanagement and criminal fraud rather than affect the redistribution of wealth.

While the traditional view is that stricter regulations do nothing to aid an economy in recession, our current problems may be the exception.  

Much of the distress in the credit market is a result of a failure in confidence.  This lack of confidence surrounding asset valuation, as well as the essential underlying health of the financial system, calls for the imposition of strict, yet reasonable regulations.  Such reform may indeed signal a return to responsible management and begin to restore shaken confidence in the financial system.

One response to “A Time for Financial Regulation

  1. All your points are well put and well taken, but what we have now from Rep. Frank is a means to arbitrary power that will politicize finance. —- http://econometrician.wordpress.com/2009/12/19/politization-as-regulation/

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