The Easy Question in Financial Regulation

Many questions in the field of financial regulation are hard to answer: Would the separation of commercial banking and investment banking help prevent crises? To what extent should individual consumers be protected against foolishly borrowing too much? Should Credit Default Swaps be regulated out of existence? What should regulators do about patterns of high executive compensation that is evidently not a reward for performance? I have views on these questions, just as other observers do. But in these cases I see the arguments on both sides.

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The question of funding the U.S. financial regulators, the Securities and Exchange Commission or the Commodity Futures Trading Commission, is easy to answer, however. I do not see the argument for cutting funding of the SEC and CFTC or for the other ways that Republicans in Congress are finding to make it difficult for these agencies to do their jobs. They are also deliberately impeding two new agencies set up in response to the 2008 financial crisis — the Consumer Financial Protection Bureau, lodged at the Fed, and the Office of Financial Research at the Treasury — from doing their respective jobs.

Bernard Madoff was the most obviously venal of the figures in the financial crisis of the fall of 2008. There is nothing hard to understand about the swindle he perpetrated, no ambiguities about where the legal line is drawn, no free-market interpretation that anyone uses to justify what he did. The SEC had been warned over and over again in the years before 2008. Why did it do nothing? In large part because it had in effect been given a mandate to regulate as little as possible.

I realize that in the United States, as in every country, we have some regulations that are excessive or undesirable. But how anyone can think that regulation by the SEC was excessive during 2001-08 and that this contributed to the financial crisis?

That is the irrationality on the Right. There is an equally irrational point of view on the Left. It goes like this: because the head of the CFTC is a former investment banker from Goldman Sachs, it must necessarily be that he is serving the interests of the financial community. It happens that Gary Gensler is doing a great job, against great odds. He has been trying to force derivatives trading into clearinghouses with lower counterparty risk, as required by the Dodd-Frank bill, to try to avoid repeats of September 2008. I can see, when an investment banker is appointed to such a position, asking questions that one would not ask if he came from some other profession. But he has been in office for 2 ½ years, pursuing regulation of derivatives with sufficient vigor to make most of Wall Street angry. Reading the words “Goldman Sachs” on someone’s resume should not be a substitute for all other thought processes.;