US Financial Regulation Debate

There is a broad international process underway, via the G20, the BIS and the IMF, to come up with new capital and liquidity rules to be applied around the world to replace Basle 2 (see here). However, beyond re-working these rules, the financial crisis has still left lots of knotty issues unresolved, such as how to intervene and unwind large complex financial institutions that are in trouble, how to regulate derivatives and whether more severe limitations should be placed on the activities of banks (perhaps through a return to Glass-Steagal style restrictions.)

Now that healthcare reform is off the agenda, there is a pretty serious discussion in the US now about financial reform: Paul Krugman has devoted his last two New York Times op-ed columns to it (here and here.) Here’s a nice summary of the current state of play. As always with US legislation, the process is bizarrely complicated and riddled with horse-trading, with a House bill and Senate bill, potential reconciliation, and a role for the White House and Treasury Department. But, to be fair to them, the process usually ends up forcing a serious discussion of all the key issues.

It seems that if this kind of thing is going to happen over here, it will need to be done at EU level, presumably with an active role for the European Systemic Risk Board (which comes into existence when?) Perhaps I’m missing it but I don’t get a sense that there is a parallel process at European level that mirrors the current US debate. It may be too much to hope for that Europe, with its patchwork quilt of different types of banks, regulations and regulators, will ever get its act together on this front.

30 replies on “US Financial Regulation Debate”

Economic warfare.

Credit has been eschewed more by European businesses thasn in the USA. As has the Stock Exchange. Notably German businesses like Lidl and Aldi. IKEA is Swedish. Volvo has been trashed as has Rover etc. Quoted stocks are a pawn to banking interests.

The problem is not quite as pressing in Europe, but there are more planners with better strategic nous in Europe than in the USA. There is a competetive devaluation of fiat currencies ongoing. Europe therefore must play its cards more slowly than the USA or UK as these two are in dire straits.

Masterly inaction!

I am reading through some of Krugman’s pieces at the moment and I do have one question. Is it possible to include the factor of hedge funds in this discussion? I think, when I was reading through Alan Greenspan’s paper last week, he made a point about hedge funds not failing during the 2007-08 financial crisis. It is unexpected I guess, and further prove that no two crisises are ever the same. I mean, anyone familiar with the turmoils in financial markets throughout the world in the 1990s, would say that hedge funds had a major part to play at many stages. Isn’t it funny how absent they seem to be from this current crisis? Any comments? Of course, hedge funds are like small banks in a way. If LTCM had been allowed to go under in 1998, we might have seen a repeat of the 1930s also, which Krugman described in this paragraph. BOH.

In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small – small enough that the Federal Reserve believed that it was okay to let them fail. As it turned out, the Fed was dead wrong: the wave of small-bank failures was a catastrophe for the wider economy.

@Karl Whelan

This is the big one – but I’m predicting a fudge – Financialization appears to be trumping the Political at most tables ……… some relevant links below:

Financial Regulatory Reform Bill Passes Senate Banking Committee and Heads to the Senate Floor
“The financial regulatory reform bill passed by the Senate Banking Committee on March 22, 2010 represents the latest milestone on the road to regulatory reform. The Committee bill, as amended by the subsequent manager’s amendment, reflects a series of new proposals and compromises between legislators and regulators. A few of the key provisions of the Senate Banking Committee’s bill and their state of play are described below. ” [with a few links to summaries for those into this stuff ……..]

At EU level Germany & France lead a move to regulate Derivatives/Hedge Funds etc … which I believe Ireland initially opposed (with UK) ……I linked on this some time back on one of the ‘Greece’ discussions .. I’m no expert, but if IFSC to have ‘credibility’ (Ouch in an Irish context at the mo) – then think we might line up with Germany on this one. [considering our recent record some HedgeFund sharks must consider us as declawed pussycats]

But, EU decision-making is excruciating in this area at the mo ……….. overall, Financialization imho remains somewhat out of control …….. and has delinked, largely, from national contexts for quite some time ………. a strong EU Voice would be useful here … [as would an EU directive to wind up AI/INBS toxic cowboy institutions]

& post health care reform in the US – The Republicans simply oppose everything – and will receive massive backing from US Financialization to tone down provisions …. they are already targetting vulnerable Democrats….. so, considering EU weakness, and Chinese caution, looks like a global fudge on the agenda, and the next global financial crisis already well underway. Locally, puny political minds incapable of playing any bit of hardball at all at all at all ………..

@KW: Not directly pertinent to above, but there is a useful and informative OP-ED in NYTimes. You might wish to direct your readers’ attention to it.

B Peter.


Some info on health-care lobbying/special interest group below (this includes only ‘official’) – this will be dwarfed by ongoing re Financial Reg in the USA:

Health care reform survived the most expensive and intense lobbying battle in our history. According to the Center for Public Integrity’s analysis, 1,750 business and organizations spent at least $1.2 billion lobbying. They hired 4,525 lobbyists—a record eight lobbyists for every member of Congress. In “Washington Lobbyists Cash in on Health Reform” the Center named the top lobbyist winners in what has already been a bonanza year for influence peddling, with financial regulatory reform still ahead.

Having just commenced to read through this website, which is an excellent idea, I am conscious there is a large volume of knowledge and shared opinions I have not to read through. Having an interest in the topic, I have to say I am somewhat skeptical that an effective and efficient regulatory framework will be put in place at a global level not alone in Ireland. I have a recollection, back in 2008, reading an article where George Soros put a global figure of 12 trillion on hedge funds putting in context the scale of the expected write-downs. Regarding our national decisions, I felt from the beginning it would have been more cost effective and efficient to have brought in the IMF to address the issues. Instead of pumping billions into a black hole-how much more still remains an unknown entity-would we have been better off to have bypassed the banks and put the same money directly into the SME’s and other commercial entities in this county, as a stimulus, to the economy. What have we done.? We have prioritised solving the banks liquidity problems and allowed our economy to drift largely dependent on developments in others economies. Where is the money now to provide a direct stimulus to our economy.? We are dependent on the banks who are drip feeding to the public the scale of their problems in collaboration with our government. Concerning the issue of strengthening our regulatory system, perhaps we should ask ourselves are the range and nature of the issues to be addressed, of a more fundamental nature. For example, should we be considering a recent suggestion made by Des O Malley, in a newspaper comment, to the effect that the citizens of Ireland need to take the initiative and put in place a new constitution. Currently reading through an interesting and insightful read of T. Ryle Dwyer’s book “I signed my death warrant” Michael Collins and the Treaty; one can but hope that we can all work together to find a solution for our country and that future generations will not feel we have committed an “act of treason” by our actions/or lack of them in substantially damaging our country for which previous generations of people fought and worked so hard to achieve the level of independence they achieved for us.

Did anyone see the TV show about the Chancellor of the Exchequer in Britain’s political system? About devaluation of the pound several times in the course of history in post war Britain. It was broadcast on BBC 2 over the weekend. I didn’t catch the exact details of the show however. I was looking at Liam Delaney’s blog and he links to several other blogs about behavioural economics there. But one blog entry at Economic Logic, reminded me of the show on the BBC 2 station this weekend. The difficulty the British had in tackling inflation, despite having a strong Keynesian belief in the Treasury organisation, before Thatcher. Of course, then came monetarism and later Gordon Brown, who all left their imprint on the institution. Here is a quote:

The limited use of credit made money demand and supply much more predictable, but this still could not prevent hyperinflationary episodes.

Surely it can be this simple:

There is a segment of the financial sector that seeks to speculate on part or all of a nation or nations output.
This speculation while initially increasing output, is damaging to the national output and interest in the long run, as it ultimately ends ups up speculating on speculation.

Such activity should be ended, and if the actors dont like it, they can fo somewhere else and mess with another nations interests.

Looking at the international situation, how much effort will the USA have to commit to righting this situation while China looks on in relatively better health. Sometimes to get in front all one has to do is wait for the others to mess up…

Can it be that simple?
Because if one dives into technicalities then one is missing the core point I outlined above, if that point be valid.

Wars need banking credit. Fast expanding industries need it. Eventually, the providers of it make so much that they employ many thousands just pumping credit into consumers. Eventually, everyone sane, has enough credit and repayments, net of expansion, begin. The pump industry dies. Before that, it can enlarge prices far too much. A bubble. Stop me if I am going too fast?
People who know this, make money on the way up and on the way down. They buy politicians if they must. But street demos work if Quinn is losing control of his insurance industry. See any of these symptoms lately?

Iraq and the rest are not necessary wars, but they generated economic activity, ie credit, and kept the system, ie credit, going. They are now failing. There are less destructive ways of making money. To finish off the depression of the thirties, there was a world war.

Fancy a repeat?

Struggling to get back on topic, I think the US will generate some package of reasonably sensible financial regulation reforms. At the moment it is suffering from the “tyranny of faction”, which the Founding Fathers took great pains to eliminate or minimise. This is clearly damaging the ability to design and implement the type of legislation required – and not just in the area of financial regulation. But the problems are procedural rather that constitutional or institutional. They include the drawing of congressional district boundaries that provide safe seats for partisans on both sides of the aisle, the lack of a measure of population-weighting in the election of the Senate and the relatively recent fillibustering convention in the Senate. I remain convinced that the good sense of the Founding Fathers will be respected in time and the required reforms enacted – though, perhaps, not in time to facilitate the passage of comprehensive refrom of financial regulation. But the process allows for continuous refinement of policy, legislation and implementation.

In this context, the EU, in stark contrast, is a shambles, but one that seems to muddle through. But the political and strategic alignment is shifting with a northern core of Germany, France and the BENELUX countries with some of the Scandinavians emerging. In many sectors, and not just banking and insurance, national champions are emerging – and being encouraged by natonal governments to develop – as EU-wide behemoths. We are moving into an era of oligopoly in the EU, with the relatively small, but nationally dominant, businesses in the smaller member-states being either marginalised in their own deboubts or becoming prey for the oligopolists.

We will have TBTF in spades and these oligopolists – supported by the core national governments – will resist any efforts at EU-wide regulation and restraint.

Strategically, it would sense for Ireland and the other smaller member-states outside the “core” to encourage co-operation, mergers, joint ventures, etc, among national businesses in various sectors to exercise some counter-vailing market and political restraint on the behaviour of the “core” oligopolists. It might then be possible to develop some EU-wide policy and regulatory control that would be in the interests of final consumers – who, apart from the purchasers of exports, pay for everything.

@ Pat D

Its not that your going too fast,
It that everyone is walking away from you.
It just looks to be the first.

We ‘regulate’all sorts of things. Why? To prevent chicanery, insider manipluation, deception, fraud, theft, whatever. Regulation is one of the ‘costs’ that must be borne. Now I know, with absolute certainty, that everyone, without exception, is completely and utterly committed to regulation. Yep? Well no, actually. Shame, but its true.

So the outsiders get shorted by the insiders and its called The Market. But once the insiders have shorn the Sheeple – the Sheeple might just become a tad cross and slam their wallets shut. Bye, bye insiders! No money, no moxie!

You get what you wish for – or so they say. Now lets just de-regulate the sale of alcholic beverages. Look at the thousands of jobs this would generate!!! Sometimes I wonder about the intellectual wellbeing of my fellows.

Bye the bye. If you are thinking about ‘regulating’ the FIRE economy, forget it. Its trapped in a Tar Pit and will not be coming out.

B Peter

Apologies for this second post.

I mentioned an OP-ED piece in NY Times (of yesterday). Someone above mentioned a Paul K piece – this is not the one I was referring to. Its a piece written by a broker who understood what was happening to the financial markets back in 2002 – and who accurately predicted ‘what would happen’.

For anyone who has a few days to spare, check out the archives on – search for FIRE econony. Alternatively you can get succinct comment from SuddenDebt.blogspot. Be warned, both sources have very extensive archives. Hours of reading and study required. These are not ‘rant’ sites. Some of the stuff is highly technical.



It IS that simple.

Since casino capitalism emerged in early 90s – hedge funds now about 18 trillion dollars or so …… I think! (I’ll come back on this later)CDS etc they make it on way up – they make it on way down – they play with lives – and they can buy fools fools fools with all that dosh ……… Financialization now out of control for 20 yrs or so ……… and they got POWER. Would drive a man or woman to Marxism ………

@ Paul Hunt,

Strategically, it would sense for Ireland and the other smaller member-states outside the “core” to encourage co-operation, mergers, joint ventures, etc, among national businesses in various sectors to exercise some counter-vailing market and political restraint on the behaviour of the “core” oligopolists. It might then be possible to develop some EU-wide policy and regulatory control that would be in the interests of final consumers – who, apart from the purchasers of exports, pay for everything.

Well said.

Have a listen to the Michael Spence podcast on Growth, linked by Stephen Kinsella here, if you get a chance.

I notice it does not go directly to the clip. About a third of the way down the page in the Video section. On the screen it says “Once upon a time in America” and underneath “Move Your Money”.

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