Sunday, January 24, 2010

Obama's new financial regulation proposals

Rather than leave financial re-regulation to Chris Dodd and Barney Frank, the President has come up with his own proposals, largely based on the ideas of until-now-unseen economic advisor Paul Volcker. (Aside: Greg Mankiw's blog has a post that suggests the proposal has been in the works for months and that the release last week had nothing to do with the Massachusetts tea party.) The proposal would prohibit banks from running hedge funds or trading on their own accounts if they accept deposits covered by FDIC insurance. It also would impose new limits on bank size. Saturday's WSJ "Intelligent Investor" column by Jason Zweig points out some complications related to the new proposals and summarizes some interesting research by Boston College finance professor Ed Kane on how regulation can become more effective. One idea I liked: send the regulators to bootcamp to instill "a sense of honor and duty" and pay the regulators like bankers -- bonuses for fewer meltdowns on their watch.

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