Regulatory Reform

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The Washington Post reports on the Obama administration’s plans for regulatory reform of the financial industry:

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

….Senior officials [also] favor vesting the Federal Reserve with new powers as a systemic risk regulator, with broad responsibility for detecting threats to the financial system. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds.

….The new [bank] regulator would assume responsibility for the safety and soundness of banks, currently divided among the Fed and three other agencies: the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. The OCC and the OTS would probably disappear, while the Fed and the FDIC would retain other responsibilities.

For what it’s worth, I’d say that having a single bank regulator is long overdue.  The current structure not only doesn’t make sense, but allows banks to shop around for the most lenient regulator they can find, prompting a race to the regulatory bottom.  It’s also a problem for big banks, which end up under the regulatory authority of multiple agencies.

The “systemic risk regulator” I’m less enthused about.  It’s not necessarily a bad thing, but it’s not clear to me that it would have done much to prevent the asset bubble of the past decade.  After all, the problem there wasn’t the lack of a central regulator, but the simple fact that no one felt like there was a lot of risk in the system in the first place.  Regulating derivative markets may be a good idea, but the real issue isn’t giving the Fed additional powers, it’s getting it to take systemic risk seriously in the first place.

In any case, I’ll repeat something I said earlier: specific regulations are all well and good, but I’d sure like to hear first what general principles are guiding these decisions.  My picks are (1) stronger limits on leverage, wherever and however it occurs, (2) a stronger commitment to countercyclical policies, and (3) a little more sand in the gears.  These might be the wrong principles to choose, but if they are, I’d like to hear which ones are right before a tidal wave of regulations comes heading down the pike.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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