Thursday, December 25, 2008

US Financial Regulation - 2009

Valuable features of blogging are that you get feedback from comments and from Google's ranking of what you have written.

Ranking high right now is a blogspot post from March 22 titled U.S. Financial Regulation 2008. I argued for broader regulation of the financial markets. President-elect Obama has announced it is going to happen. My post begins:

In late 1999, the bulwark bank regulation of 1933, the Glass-Steagall Act - the wall between investment banks and commercial banks - was torn down. This was a great victory for creative bankers, who had found the wall irksome and restrictive.
The post can be read here.

I cited an FDIC staffer with a distinctive floppy hat warning me 40 years ago about the disastrous consequences of a drying up of bank credit. His comment is particularly poignant given what has happened since March 22.

Would I change anything if I was writing from today's perspective? Yes, I would have added references to post-1999 moves toward financial deregulation. In particular, I would reference a Texas Observer article by Patricia Kilday Hart on May 30. It describes the unseemly haste with which at the end of 2000 Sen. Phil Gramm managed to insert a rider facilitating a market in credit default swaps. The CDSs added a whole new layer of risk to the U.S. financial sector and was a large factor in the credit meltdown.

To their credit (worth noting given that Democratic legislators have recently been criticized as deregulatory co-conspirators), former SEC Chairman Arthur Levitt and Sen. Chuck Schumer both expressed deep concerns about the new law. Levitt worried about the increased leverage and risk that CDSs would create, and the splitting of regulation between the SEC and the Commodities Future Trading Commission. Sen. Schumer agreed with him and told Sen. Gramm, Chairman of the Banking Committee, that "I would rather do it right than do it quickly." See the Joint Committee Hearings on S. 2697 - The Commodities Future Modernization Act of 2000, pp. 45-46.