Effect of the Super Regulator
There are many fixes for the financial industry being bandied about Congress and from experts in the field. While not all will be implemented, it is a safe bet that regulatory powers will be increased just from the fact that financial firms have been at ground zero in this current economic crisis. Obviously, the mention of additional regulation creates significant concern and histrionics for some, but I feel that this is a turn in the right direction. Before I start on my defense of additional regulatory powers, I would like to state I am in favor of financial innovation. I just draw the line when that innovation creates systemic risk to our broader economy.
First, the current regulatory bodies are everything and nothing at all. I find it a waste of resources having a myriad of governmental entities that cannot act as a cohesive unit. It makes more sense to combine and scale their efforts to provide swift action in a crisis or even proactive assistance. Second, while we have a process for managing our banking system, we do not have a way to affect financial services firms that exist outside of the banks but have significant exposure with the financial system. As evident by the AIG meltdown, the Government needs the ability to step in to fix the problem instead of only being able to lob money at the problem from afar. Last, the Federal Reserve has needed updating for quite some time due to the rapid changes in financial services. We avoided a major financial failure with Long Term Capital Management in the late ‘90s (http://www.erisk.com/Learning/CaseStudies/Long-TermCapitalManagemen.asp), but yet failed to enact any real regulatory change to avoid the issues created from having massive counter party risk backed by a single entity. It is unfortunate that we had to fall off the cliff completely for taking action (I hope).
What are your thoughts?
