Wall Street & Markets

The financial regulation plan: Mixing the timid with the not so timid

By Justin Fox | June 16, 2009 | +

The WSJ and Washington Post both appear to have gotten their hands on the Administration’s financial regulation “white paper” (the Post even has a pdf of it). I’ll write more on the subject tomorrow, but a couple of thoughts for now.

First, the new Consumer Financial Protection Agency seems like a big deal, and a good idea. It is also, reports the WaPo, already getting critics riled:

They … are concerned that a consumer agency could be overly restrictive, limiting access to loans and constraining financial innovation.

“This consumer protection agency would be deciding how people get to live as opposed to people getting to decide for themselves,” said Kelly King, chief executive of BB&T, a large commercial bank based in North Carolina.

What a load of hooey. We already have lots of regulations that decide how people get to live financially. It’s just that right now they’re all administered and in some cases written by agencies also charged with making sure banks are profitable. Guess what—protecting consumers and keeping banks profitable don’t always go together. There’s a lot to be said for separating the two tasks.

Another reasonably bold—and sensible—part of the proposal concerns over-the-counter derivatives. Reports the WSJ:

OTC derivatives that are considered “standard” will be required to be centrally cleared and executed on an exchange, according to the senior administration official. Customized contracts will face “high capital” charges, the official said, with additional transparency for all OTC derivatives either through depositories, clearing houses or exchanges. The move appears aimed at encouraging standardized OTC derivatives.

What’s missing from the proposal is any kind of plan for breaking up too-big-to-fail institutions, or for dividing the financial sector between firms that take big risks and those that provide essential services (a modern-day version of Glass-Steagall). The Obama Administration would apparently prefer to keep dealing with the handful of big banks (among them a couple of former investment banks) that have survived the crisis, hoping that more stringent capital requirements will keep them from getting us all into trouble again. But gaming capital requirements is what banks do. For the next decade or two I imagine regulators will do a pretty good job of policing this. Eventually they won’t.

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  • boguth

    King: This consumer protection agency would be deciding how people get to live as opposed to people getting to decide for themselves.

    Fox: What a load of hooey. We already have lots of regulations that decide how people get to live financially.

    You don’t have to take sides in this debate to find Justin’s response to be lacking. If the current regulations operate an injustice–which Justin hasn’t disagreed with (he only said that current regulations are already paternalistic)–the answer to the “hooey” comment is something like don’t extend paternalistic regulations.

  • tanboontee

    The financial regulation plan aside, will someone formulate a plan to reduce the incredible national debt?

    There exist two possible reasons why some leaders worldwide have been oblivious to debt (in red).

    First: Politicians can be numeral phobic. They shun any information presented in numbers, for they could not extract any meaning from the digits — the longer the digits the more the meaningless. So when it comes to mind-boggling trillions, it would appear as only another harmless number.

    Second: People like to wear colour spectacles. Red figures would appear black to people wearing pure blue or green glasses. In which case, there is no debit (red), only credit (black).

    The US national debt is fast climbing up to $11 trillion. To overcome the financial crisis, more money needs to be borrowed (not all PRINTED). So who cares if it goes up by another couple of trillions as long as immediate problems are temporary solved to some people’s satisfaction?

    Let the future generations shoulder the burden. Why NOT?
    (Tan Boon Tee)

  • http://www.124monkeys.com Sean DeCoursey forgot his password

    Boguth,
    -
    The military probably has more silly paternalistic rules and regulations than any organization on the planet. Whenever my buddies and I encounter a particularly bad one, we just sit around and try to think of what disaster prompted this particular rule. Because those rules only get enacted because somebody did it and caused disproportionate amounts of chaos.
    -
    Paternalistic financial regulations are needed BECAUSE SOMEBODY DID IT and caused disproportionate amounts of chaos. In this case, what somebody did was blow up the international credit markets and world economy.

  • jjworleyeoe

    Great news. Now, take the following sentence:

    “Customized contracts will face “high capital” charges, the official said, with additional transparency for all OTC derivatives either through depositories, clearing houses or exchanges.”

    And add new energy regulation that requires:

    Oil contracts will face “high capital” charges, the official said, with additional transparency for all oil contracts either through depositories, clearing houses or exchanges.

    In doing so, the price of oil will become more stable and most likely will drop. Then, increase federal and state taxes on gasoline and use the profits exclusively to fund the electrification of vehicles. America needs to be building its own vehicles and all the technology that goes into them.

    As such, there’s no reason why the same sort of financial regulation can’t be applied to oil and natural gas. America needs to get off oil, a daunting task, ASAP, eliminating the source of revenue for Islamic terrorism.

  • donthelibertariandemocrat

    Maybe because I have a kidney stone, but, for whatever reason(s), I was surprised at how much I disliked this plan. Not so much the details, but the underlying assumptions. I could be wrong, but these seem to be:
    1) We could have had a Debt-Deflationary Spiral or Major Social Disruptions, but we didn’t. Hence, the system is not in need of any underlying or fundamental reform. As well, to the extent that we have these occasional busts, they are acceptable given the “Goose That Laid The Golden Egg Theory”, which says that we’re better off with these busts than fiddling around with the underlying system.
    2) We have an interest based welfare state, and any political solutions should conform to that model.
    After reading it twice, the plan qualifies as fighting the last war, and on all fronts. In other words, they listed all the possible causes, and then proposed an interest based solution to each cause listed. So, I can see some good coming from these proposals. But as to the big picture, I have a view akin to Mr.Fox’s view:

    The system of implicit guarantees and too/large powerful/to fail financial concerns will remain.

    The plan is wishful thinking where time and regulation are concerned.

    I could go on, or talk about other specific problems, but the fact that these two problems remain, as they did after the S & L Crisis, all but ensures another crisis that we will have another crisis needn’t have occurred.

    I also agree that it’s a good sign that they’re taking Fraud, Negligence, Collusion, and Fiduciary Mismanagement, seriously, but, without serious investigations of the crimes involved in this current crisis, it will not have the desired potency of deterrence.

    I understand that my option, Narrow or Limited Banking, is going nowhere, but we can still do better than this to protect our financial system. From my point of view, the fact that we came so close to a Debt-Deflationary Spiral, shows that our system is not sound. It will remain unsound, I fear, until we consider the ideas of Simons,Knight,Fisher,Friedman,and Minsky, and construct an appropriately strong foundation for our system.

  • http://www.theseminal.com/2009/06/18/nothing-but-words/ Nothing But Words – The Seminal :: Independent Media and Politics

    [...] thought was expressed well at Time [...]

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