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Thursday, April 04, 2013

'Don’t Panic – Financial Reform is Coming'

Barney Frank is confident that new financial regulation "will be completed in time to prevent the type of crises that they are intended to prevent":

Don’t panic – financial reform is coming to America, by Barney Frank, Commentary, Financial Times: We are going to sort out the US financial system. This might seem a bold statement when, two and a half years after the Dodd-Frank Act was signed into law, much necessary regulation is still not on the books. But with the re-election of Barack Obama, I have no doubt that the necessary new rules will be in place in good time. ... Some of the factors responsible for the pace were inherent in the task. ...
This brings us to the set of obstacles to filling out the rule book... First, the SEC and the CFTC receive vast amounts of comments for each proposed rule, which they must process. Meanwhile, the Republican House appropriations committee starves them of money. ...
This is where the DC courts come in. Not only do these agencies have to go through comments, the court then grades their work... On several occasions, DC courts have struck down SEC and CFTC rules, not because of any constitutional problem, but because the conservative judges think the agencies have given too little deference to the financial industry’s arguments.
Documenting decisions to the degree that the court requires would be difficult in any circumstance. Doing so with ... Republican underfunding is impossible. This was, in part, what was at stake when the Republican Senate minority filibustered to death an Obama appointee to the DC circuit. ...
The rules will be completed in time to prevent the type of crises that they are intended to prevent, but later than they should be. But the fault for that will rest with Republican appropriators withholding adequate funding and Republican senators filibustering to maintain the DC circuit as a rightwing bastion.

I am not as confident as he is that we will get the rules we need. In addition, notice that he talks about preventing financial crisis. However, we can never fully prevent a financial collapse, only make it less likely. Thus, there is another aspect of regulation that is just as important as trying to prevent problems from occurring, building systems that are robust to shocks. Leverage is a good example. Limiting leverage can limit the "unwind" that occurs with large negative financial shocks and thus limit the downside risk.

The recent financial collapse surely illustrated that we need better regulation to reduce the chances of financial collapse, but it also illustrated -- starkly -- that the sorts of shock absorbers we should have in place are missing. Yes, things like limiting leverage will be resisted mightily by the industry and the politicians in the financial industry's pocket, but this type of protection for the system is just as important as trying to prevent problems in the first place.

    Posted by on Thursday, April 4, 2013 at 01:11 AM in Economics, Financial System, Regulation | Permalink  Comments (28)


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