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Friday, June 04, 2010

Stiglitz: Financial Re-Regulation and Democracy

Joe Stiglitz on financial reform legislation and the danger that the outcome will "be a sad day for democracy":

Financial Re-Regulation and Democracy, by Joseph E. Stiglitz, Commentary, Project Syndicate: It has taken ... more than three years since the beginning of the global recession brought on by the financial sector’s misdeeds for the United States and Europe finally to reform financial regulation. Perhaps we should celebrate the regulatory victories in both Europe and the United States. ... But the battle – and even the victory – has left a bitter taste. ...
Banks that wreaked havoc on the global economy have resisted doing what needs to be done. Worse still, they have received support from the Fed, which ... reflects the interests of the banks that it was supposed to regulate.
This is important not just as a matter of history and accountability: much is being left up to regulators. And that leaves open the question: can we trust them? To me, the answer is an unambiguous no, which is why we need to “hard-wire” more of the regulatory framework. The usual approach – delegating responsibility to regulators to work out the details – will not suffice.
And that raises another question: whom can we trust? On complex economic matters, trust had been vested in bankers ... and in regulators... But the events of recent years have shown that bankers can make megabucks, even as they undermine the economy and impose massive losses on their own firms. Bankers have also shown themselves to be “ethically challenged.” ...
We should toast the likely successes: some form of financial-product safety commission will be established; more derivative trading will move to exchanges and clearing houses...; and some of the worst mortgage practices will be restricted. Moreover, it looks likely that the outrageous fees charged for every debit transaction – a kind of tax that goes not for any public purpose but to fill the banks’ coffers – will be curtailed.
But the likely failures are equally noteworthy: the problem of too-big-to-fail banks is now worse than it was before the crisis. Increased resolution authority will help, but only a little: in the last crisis, US government “blinked,” failed to use the powers that it had, and needlessly bailed out shareholders and bondholders – all because it feared that doing otherwise would lead to economic trauma. As long as there are banks that are too big to fail, government will most likely “blink” again. ...
The Senate bill’s provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks. If effective restrictions on the derivatives business of government-insured banks ... survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists.
But if, as most pundits predict, these restrictions are deleted, it will be a sad day for democracy – and a sadder day for prospects for meaningful financial reform.

    Posted by on Friday, June 4, 2010 at 03:42 PM in Economics, Financial System, Market Failure, Politics, Regulation | Permalink  Comments (37)


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