Saturday, June 5, 2010

Joe Nocera's Column on Financial Regulatory Reform

Joe Nocera has an interesting column on financial regulatory reform in today's New York Times.  I agree with him that, even though the House and Senate bills are long and complicated, they do less than advertised to reduce systemic risk.

Near the beginning of the column, Nocera writes that "there is nothing even remotely radical about anything in these bills.  Nobody is suggesting setting up a new Securities and Exchange Commission, which reshaped Wall Street regulation when it was formed in 1934.  Nobody is talking about breaking up banks the way they did in the 1930s with the passage of the Glass-Steagall Act.  Nobody is even talking about a wholesale revamping of a regulatory system that so clearly failed in this crisis."

While responsibility for the financial crisis can be attributed widely, the failure of government regulators to do more to head off or lessen the severity of the impending crisis was not in the main due to a lack of authority but to a refusal to use it.  The argument that hardly anyone saw it coming is not convincing.  While the severity of the crisis probably surprised most people, it was obvious to that there could be a financial crisis of some sort.  That there were problems in the subprime mortgage was clear, as was a rate of increase in real estate prices that was unsustainable and had resulted in a very high ratio of house prices to rents.

Unfortunately there has been very little attempt to address the causes for this regulatory failure.  Rather, there has been highlighting of such provisions as forcing plain vanilla swaps onto trading platforms and into clearinghouses.  This is not necessarily a bad idea, but it seems to be a smokescreen for the absence of more fundamental reform.

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