Choices in Financial Regulation

Only a few stark choices face those fashioning financial regulation reform, though thousands of discrete issues may arise. As reported, David Zaring and I present a framework to assess the stark choices in a piece released this morning on SSRN entitled The Three or Four Approaches to Financial Regulation.

Scores of proposals are circulating that would overhaul financial regulation. Most propose radical change. This means concentrating power in the federal government, consolidated in the executive branch, under Presidential control, or agencies insulated from political accountability.

We caution about a perceived exuberance in the current atmosphere. We think it is more desirable to identify the particular weaknesses manifested by the current crisis and correct them, not revolutionize the system.

That means changing the prevailing approach to credit ratings for investment securities, a federal overseer of state mortgage origination and a transparent trading market for complex financial instruments.

It does not mean federal preemption of state insurance law or state banking laws, or consolidating oversight of all massive institutions in the Federal Reserve or Treasury. It may not even mean merging the SEC and CFTC.

It certainly would not officially ordain what the Fed and Treasury have been doing for more than a year: running an opaque and unaccountable roving commission in search of safety and soundness no matter the industry, whether banking, automotive, insurance, money markets, or commercial paper.

We are not optimistic that our view will prevail in the current atmosphere. Nevertheless, we think the view is worth expressing and should be considered as lawmakers and policy wonks react to the political pressures and opportunities that financial crises invariably bring. That is why Zaring and I subtitle the piece: A Cautionary Analaysis Against Exuberance in Crisis Response.

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2 Responses

  1. Joe says:

    I don’t think there’s ever a way to prevent what just happened. People are too creative, and too willing to make money at someone else’s expense.

  2. D says:

    I agree with 1. We need some device that snares people like Angelo Mozilo or Joe Cassano. Please don’t throw the whole ‘stifling risk taking’ argument. I’m sure we possess the linguistic agility to come up with language that appropriately holds those, who make such reckless decisions that have a drastic and disastrous effect on the world economy, accountable while simultaneously not stifling ‘risk taking.’