Friday, June 19, 2009

Whither financial regulations?

This week the Obama administration issued proposals for expanded regulation of financial markets. This should be viewed as an opening gambit. Goodness knows what, if anything, will make its way through Congress. The package expands the role of the Federal Reserve as a financial regulatory agency and that concerns me a bit for two reasons. First, the Fed has enough on its hands these days dealing with the money supply and short term interest rates; can any Fed chairman keep his or her eye on a vastly wider range of issues? Also, wider regulatory powers will invite enhanced political meddling from Capitol Hill and the White House, potentially compromising the Fed's independence.

Paul Krugman is pleased that the proposals regulate the "shadow banking system," or at least what is left of it. Krugman is less pleased that the plan does not address compensation issues more aggressively.

Simon Johnson thinks the proposals lack teeth. He raises the interesting point that if some banks have become too big to fail, shouldn't we cut them down to size? I am emotionally sympathetic to this view, but I am doubtful that (1) this could be done under existing laws (Sherman Act, Section 2: I don't think so) and (2) we could trust the government to have the power to decide how big is too big.

So far both links come from a left-of-center perspective. I will add more balance over the next few days.

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