A well functioning financial system is essential to the lives of customers, investors and businesses alike. We have just seen the dangers of a system that is broken and dysfunctional. A key part of that system is the regulatory framework which is supposed to oversee the smooth functioning of the financial markets. Clearly that has not happened and we are now paying the price for that failure.
There is no question that the nation’s financial regulatory framework needs to be overhauled. The existing apparatus is a hodge-podge of institutions with conflicting and overlapping responsibilities, clients, rivalries, congressional supporters and institutional biases. The result has long been that many financial institutions can shop around for the regulators that they like and regulations that best meet their needs. An ever increasing number of financial institutions have very little, if any, real oversight at all.
In very large part, the financial crisis that we are now living through, was created and made worse by many of the failures of the existing system. The prevailing gaps in the system were made worse by the decades long view that the financial markets could be self regulating. In one of the most candid statements in decades, the former Chairman of the Federal Reserve, Alan Greenspan, has openly admitted the failure of that philosophy.
Unfortunately, however, the current proposals that have been presented for Congressional consideration do very little to fix the core problems of the present system. In the midst of this, we are being bombarded by over the top, self serving Congressional rhetoric. The are shocked, shocked to discover the market practices that they helped perpetuate over the course of the last thirty years. Sadly, this is not the environment to write prudent legislation in.
In June of 2009, I wrote an article entitled “Washington’s Financial Fig Leaf” which took the Obama Administration to task for not offering a more vigorous proposal.Little has changed since then.
Among other problems one could easily list the following:
1) The existing patchwork of regulators has not been touched. The conflicting Congressional jurisdictions overseeing those regulators has not been challenged.
2) The creation of a bailout fund will be of little, if any value. Given the size of our financial institutions, a full blown financial crisis in the future will draw down such a fund in an instant. What we simply need is tighter capital requirements.
3) If past is prologue, such a fund will be used for all manner of unrelated uses and the fund will not be there when needed.
4) Nothing has been done to improve the quality of the regulators who are now severely out gunned by their counterparts in the financial institutions.
5) There is no need for more regulatory institutions when the existing financial regulatory institutions have dramatically failed to prevent the half dozen or so crisis of the past twenty years. Let’s get what we have to work much better before we add to the hodge-podge.
6) Nothing has been done to fix the problems associated with the government sponsored enterprises – notably Fannie Mae and Freddie Mac. They should be privatized.
7) One of the central causes of the financial crisis was the systemic failure of the rating agencies. This bill does absolutely nothing to address these failures. It is business as usual at these firms. There business model must be changed to move away from the system where firms can shop for the best rating possible.
8) The provisions to name banks "too big to fail" is totally unrealistic and unworkable.
9) There are elements of this bill that might lead to needed transactions merely going abroad to foreign institutions thereby weakning American competitiveness and exporting U.S. jobs.
There are some good measures in this new 1,400 page bill. There are sound provisions which make the regulation of derivatives tighter and incorporate oversight over previously unregulated financial institutions. But, on the whole, this proposal is a triumph of rhetoric over reality, politics over efficiency. The over heated partisan atmosphere has produced a bill that is hastily constructed and a missed opportunity to get it done right.