Financial Reform: “You can’t fix what you can’t explain” continued

Damian Paletta (WSJ) has a summary of the conference committee’s final agreement on the new financial regulations.

There is nothing all that surprising here: expansion of regulation (with a few politically expedient exemptions and some revenue sweeteners).

Rep. Jeb Hensarling (R., Texas) is quoted in the above story as saying: “My guess is there are three unintended consequences on every page of this bill.”  My guess is that the good congressman is understating things. But even if he isn’t, at almost 2,000 pages—pages that, if experience proves true, have never been read—that is a lot of unintended consequences.

Let us recall that in May 2009, Congress passed legislation to create a  Financial Crisis Inquiry Commission “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The commission was given broad investigative powers and is still holding hearings (indeed, it is scheduled to hold hearings next week on the role of derivatives in the financial crisis, where it will question witnesses from American International Group, Inc., Goldman Sachs Group, Inc., the U.S. Commodity Futures Trading Commission, the Office of Thrift Supervision, and the New York State Insurance Department).

Congress directed the commission to submit its report and specific findings on December 15, 2010. Presumably, this report could prove useful in making sense of the financial crisis and designing a new regulatory architecture. That is, it could prove useful if one believed that Congress and the administration were intent on good policy rather than good politics. But as is so often the case, politically established timetables trump careful deliberation.

Senator Dodd is quoted in the above story as saying: “This is about as important as it gets, because it deals with every single aspect of our lives.” Indeed, one measure of its importance is that Congress decided to act before it had allowed the experts it appointed to do the heavy intellectual work to complete their mission.

One thought on “Financial Reform: “You can’t fix what you can’t explain” continued

  1. You can’t fix what you don’t understand.

    Have you ever heard about a financial crisis that happened from lending or investing in anything considered risky? Of course not, they have all started with lending or investments to something that offered more returns than what its perceived risk merited. Even the infamous Dutch tulips, in their own bubble time, would probably have been rated AAA.

    That is why the current paradigm of assigning lower capital requirements to what the credit rating agencies perceive as having lower risk, like if they possessed some extraterrestrial sensorial abilities others don’t, is plain ludicrous. That only increases the expected returns from what is perceived as having no risk… precisely what would be prescribed for a financial heart-attack.

    And since the G20 does not yet get that do not hold your breath waiting for any major progress in financial regulatory reform.

    Also, to allow financial regulators to focus so excessively on the risk that lies closest to their heart, namely the risk of default, is, in a world with so many other risks, like the AAA rated BP can attest to, is scandalous.

    The biggest risk for society is that our banks will not perform efficiently their role in allocating capitals and it is always better for them to fail when taking real and worthy risks than to survive or fail taking useless Potemkin risks!

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