The future of improved financial regulations depends largely on how the differences between the House and Senate bills are resolved.
If the strongest provisions of each are preserved, there is the prospect of hallmark regulatory reform — marking the end of an era of mindless deregulation.
But if the final bill that emerges from conference reflects the lowest common denominator, then we can only pray to be spared another financial crisis in the near future. Our economy and our Treasury can ill afford another such episode.
Underpinning reform should be a clear understanding of a financial system’s functions — and an awareness of how poorly ours filled its roles. It did a dismal job of allocating capital (providing credit to the creditworthy); managing risk, and running an efficient payments mechanism.
The argument that we should delay some desirable reforms for a few years — for more “study” or until the financial sector has been better recapitalized — is unconscionable; continued regulatory forbearance puts the economy at risk.
On several aspects of reform there is (outside the vested interests) broad consensus: A strong financial product safety commission is imperative. Regulatory structures matter, and it is essential that there be a regulator that sees its first obligation as protecting ordinary Americans against the rampant abuses pervasive in the financial industry.
As a New York Times editorial of May 21 argues, “The final bill should establish an independent agency with full rule-making and enforcement powers.”
There can be no exceptions. Why should a car dealer or a small bank be allowed to exploit a poor or uninformed consumer, any more than a big bank? Auto loans, after all, are the second most important form of lending after mortgages.
Other legislation has curbed some credit card abuses, but there is more work to be done.
Modern technology allows for an efficient electronics payment mechanism, which our uncompetitive financial sector has resisted; it imposes what is, in effect, a tax on every transaction. But this tax enriches bank coffers rather than being used, as it should be, for public purposes.
The final bill should curb these exploitative fees.
The House version is absolutely correct to impose a fiduciary responsibility on brokers that give investment advice. We need to restore trust to our financial system; and the system’s resistance to this, and other reforms intended to bring a modicum of investor protection, demonstrates why we should not give that trust.
So, too, it is important that there be a systemic regulator — one that sees the system as a whole. This cannot be the Fed — or only the Fed — because it is tied to the banking system and reflects those interests.
Successful regulatory reform must be comprehensive: There can be no place to hide. Otherwise, regulatory arbitrage poses obvious risks to our economy.
Any financial institution representing systemic risk — whether it calls itself an insurance company or an investment bank or a commercial bank, whether it writes derivatives as a form of insurance or as an instrument of speculation — must come under comprehensive regulation.
The implosion of Long-Term Capital Management taught us that one hedge fund could put the entire economy at risk. Even small to medium-sized firms engaging in similar behavior can lead to systemic risk.
The greatest challenge facing the conferees will, however, be to curb excessive risk-taking and the underlying forces that give rise to it.
Neither the House nor the Senate bill goes far enough, for example, in dealing with the problem of too-big-to-fail institutions. We need to be realistic. In the most recent crisis, government “blinked,” bailing out shareholders and bondholders when it didn’t have to. It feared that doing otherwise would lead to economic trauma.
in full:
http://www.josephstiglitz.com/
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