From the Keyboard of an Ultra-Capitalist: Financial Regulation Needs a Bottoms Up Look

 

Roger Lowenstein’s piece for the NY Times Magazine is notable not for a its broad theme, although it’s one with which I heartily agree.  Rather, it’s this phrase that caught my attenton:  “each time the problem gets bigger.”

In an administration as chock full with policy meltdowns as this one, its hard to get your mere major screwups noticed.  And clearly, the regulation of the nation’s financial markets and institutions falls into this category.  A look back to the beginning of the decade is a chronicle of embarrassments:  transparently fraudulent accounting; rampant insider trading and options backdating; a market failure in bond ratings agencies; the largest (and almost certainly not the last) thrift bailout in history; the behind-the-scenes bailout of the fifth largest investment bank; and now the attempt at a Fannie/Freddie diving catch. 

Of course, each one of these situations is different and as Lowenstein points out, the government should draw a far brighter line than it does between situations in which it is risking taxpayer assets and those where its role is purely regulatory.  But in each situation, the responsible powers that be appeared to be caught almost completely flat-footed (the comic-if-it-weren’t-so-sad Chuck Schumer letter being the best example), and reacted after most of the harm was already done.

The “solutions,”: all put forth in great haste, range from the merely pathetic (cracking down on the “spread of rumors”) to the uneforceable (playing the heavy on short selling) to the demagogic (investigating–eekk!–speculation in energy markets) to the largely counter-productive (Sarbanes Oxley).  In each case, these lame attempts at market regulation have the distinct feel of giving Ms. O’Leary’s cow a rap on the snout after the deed was already done.

Obama needs to name a Treasury Secretary with serious business cred.  And near the top of the chief capitalist’s agenda needs to be a wholesale look at the regulation of the markets that make capitalism hum.

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