The Debate Over Financial Regulation

Tim Geithner will be testifying before both Senate and House committees next Thursday on the administration’s proposal for financial regulation. In the meantime, there will be a lot of talk about financial regulation.

The Wall Street Journal (subscription required) and Washington Post (subscription not required) have been reporting on how the administration’s plans have been “pared back.” Those articles mainly dwell on the likelihood that the administration will not try to abolish and consolidate agencies as had once been thought possible (although OTS and OCC may be merged). This is interesting, given that Larry Summers just said that eliminating regulatory arbitrage was one of his key principles.

Tyler Cowen has some intelligent thoughts on why consolidation may not be such a great idea. My feeling is that consolidation could be good insofar as the current situation is clearly bad. I agree with Felix Salmon:

The current regulators have clearly failed at their jobs, there’s no reason for entities like the OCC and the OTS to continue to exist, and it’s worth remembering at all times that the number of large American financial-services companies with intelligent and sophisticated and effective regulation is, currently, zero.

(On just how bad the OTS is, see Planet Money’s podcast from last Friday.)

However, I agree with Cowen that consolidation in itself will not accomplish a lot. The real key, as in most things, is power, and here Cowen has another good point: “Many of the real regulatory problems are due to the preferences of Congressional committees and it is high time we admitted this.  How about reforming them?”

Finally, over at The Hearing, we have started an occasional series on various aspects of financial regulatory reform. So far we’ve had Lawrence Baxter and Joel McPhee, David Zaring, Dan Immergluck, Brett McDonnell, and blogging star Mark Thoma. More to come next week.

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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