Blogs & Comment

Obama's regulatory splash

The preamble to the new regulatory reform bill being introduced by the Obama administration is interesting, summing up as it does the state of the current downturn and summing up how it is that we got here.
Obama thinks were close to a Great Depression II, apparently. According to the introduction, Over the past two years we have faced the most severe financial crisis since the Great Depression.
Some other selected quotes:
-The roots of the crisis go back decades. -Years without a serious economic recession bred complacency among financial intermediaries and investors. -Rising asset prices, particularly in housing, hid weak credit underwriting standards and masked the growing leverage throughout the system. -At some of sour most sophisticated financial firms, risk management systems did not keep pace with the complexity of new financial products. -Market discipline broke down as investors relied exclusively on credit rating agencies. -Households saw significant increase in access to credit, but those gains were overshadowed by pervasive failures in consumer protections, leaving many Americans with obligations that they did not understand and could not afford. -While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system. -Existing approaches to bank holding company regulation focused on protecting the subsidiary bank, not on comprehensive regulation of the whole firm. -Investment banks were permitted to opt for a different regime under a different regulator, and in doing so, escaped adequate constraints on leverage.
That about gets it right. The impressive performance of the U.S. economy over the last several years was actually a result of expanding consumer credit, not really any real economic activity. The credit bubble pushed up asset values across the system. The credit bubble expanded because regulators failed to step in. That credit bubble, the largest since the ’20s, is now collapsing like it did before the Great Depression.
Of course, this suggests the U.S. doesnt really need a new regulatory system. U.S. regulators just need to apply regulatory pressure to maintain adequate capital levels, appropriate leverage and lending regulations. As one commentator said about the restructured regs contained in the bill (the Fed is going to get new powers to watch over banks), I dont see anything here other than a rearranging of the deck chairs. We dont need anything on structure. We need to see something about the intention to apply regulations.