How to Reform? The Big Question

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In wake of the financial crisis the public is demanding more regulation on the banks and other financial institutions that have put the country’s economy where it is.  These regulations range from total transparency with derivatives, breaking up of the “Too Big To Fails” (TBTF), and other restrictions on financial institutions.  Anyone can easily see that this is a complex topic, now throw politics into the mix.  On the Baseline Scenario many author and financial reform bloggers have discussed this topic and its issues.

In Financial Regulation and Fools, James Kwak talks about the new bill that going through the Senate right now and the inefficiencies created by politics.  “It [Dodd bill] is largely about politics” and the huge divide between the Republicans and Democratic parties is centered on the bill’s amount of regulation and flexibility in regulation.  With this divide in mind, the Dodd bill was created and is currently in the Senate, but unfortunately it’s not the solid financial regulation bill most people want.

Personally, the bill’s present form is attractive in the sense that “everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force” (Krugman).  The council gives flexibility to the reform of the financial industry that has proven skilled at finding loop-holes and ways to go around strict legislation.  Their flexibility will give them the ability to quickly plug these “gaps” and adjust regulations to balance room for growth while also continuously monitoring the industry.   On the other hand, Krugman in Making Financial Reform Fool-Resistant and Kwak his post feel that leaving everything to a single council (the “fools”) will only create more problems.  They both agree that to give the reform “a fighting chance of actually working” (Krugman) the bill needs “strict rules” that aren’t left to the discretion of the council.  They argue that the Financial Stability Oversight Council of 2005 dismissed warnings about the housing bubble — and who asserted in October 2005 that “increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system.” Krugman makes a point that if they did this then, can we trust them with the reform of our entire financial industry and quite possibly our economy?

Well as the battle between Republican and Democrat rages on in DC over the Dodd bill, the regulation of the financial industry is still up in the air.  What are your thoughts on the type of reform that is needed, and whether you think it’s politically possible to become legislation?

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5 Responses

  1. Personally, I think we will be in deadlock on this one for awhile. Both parties take huge contributions from banks and other financial services firms and are unlikely to bite down too hard on the hand that feeds them. I’m surprised there hasn’t been more discussion on the repeal of the Securities Exchange act of 1933 with Gramm Leach Bliley in 1999. It seems to me that this should be where some of the finger pointing should be in terms of what new legislation should be focused on. I’m not saying I’m opposed to deregulation, but repealing the 1933 Act really opened us up for the type of systematic disaster we experienced last year. Should we enact similar restrictions on banks again? I would hope not and I would like to think that what comes out of the recession was a necessary lesson that we needed to learn in our newer era of deregulation.

  2. You completely right, Christian. Similar restrictions to the Securities Exchange Act of 1933 and other new regulations are not the answer. For years corporations have found loopholes and ways around them. The Dodd Bill may not be the best thing, but it will do better than not passing any legislation. From what I have read about the Dodd Bill is that though it lacks firm and “strict” rules on regulation it has flexibility. In an economy like ours, so linked to our financial markets flexibility is needed to respond accordingly instead of going through the lengthy process of getting legislation passed. The Council though it has failed in past, it may represent our best option when it comes to regulating a fluctuating market like the US financial industry.

  3. I disagree with the Middleman, but only because I feel that a distinction needs to be made. New regulations do not necessarily mean more regulations; and I consequently feel that new regulations are needed. I believe that the regulations currently in place need to be reevaluated and discarded if they are judged to be inadequate. Doing so would enable the creation of new regulations that better address the issues facing our economy without resulting in an overabundance of regulations that would restrict the flexibility of the market. Still, I do agree that companies have found loopholes in regulations in the past and will most likely seek to do so in the future. As a result I do think there is the need for an oversight body of some sort; yet concentrating all that power in one place worries me as well.

  4. That’s a good point, Derek. Not all regulations in place are useful or even helpful. My point about the Financial Stability Oversight Council is it’s the only way the Dodd Bill will pass since it’s a form of regulation that the republicans and democrats both agree on. The council itself does have a lot of power, some think too much, but if it truly has too much power that will negatively affect the financial market and the economy then it won’t most likely be passed. But the council itself is a good idea for flexible regulation, whether it’s adjusting old regulation legislation or creating new legislation. The council is a collective group of about 5+ government monetary, economic, and financial agencies. So technically it’s not just an oversight body from one agency.

  5. […] How to Reform? The Big Question […]

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