Saturday, October 10, 2009

Constructive criticism of Obama's financial regulatory proposals

Fortune magazine asks several economists their opinions about President Obama's financial industry regulatory proposals. Overall, they're not impressed.

Prof. Richard Carnell, Fordham University Law School:
It places naive faith in regulation. Yet regulation failed disastrously over the past decade. Bank regulators had ample powers to keep banks safe but did too little, too late.
Byron Wien, Vice Chairman, Blackstone Advisory Services:
There are two areas where I think regulation is needed. The first is bank leverage. The rules are on the books and it's up to the Fed to implement them. ... The second is derivatives and there we really need to write some new regulation providing greater transparency, margins, risk sensitivity, and awareness.
Prof. Darrell Duffie, Stanford University:
I think [the regulatory plan] is a major step in the right direction, but there's room for improvement. ... The regulatory plan could improve, most importantly, by providing additional clarity on how large systemic financial institutions can be safely resolved. There can also be further improvements in the price transparency of over-the-counter derivatives.
Michael Lind, New America Foundation:
I think this is doomed. ... In the U.S., discretionary regulation tends to be corrupted. I want structural separation between retail banking and casino banking, where retail money couldn't be used to finance the proprietary trading.
Jaret Seiberg, Concept Capital:
The fundamental problem during this crisis was that when times were good no one had the political will to pull the plug.
Robert Pozen, MFS Investment Management:
The Federal Reserve should monitor the system and then work with the functional regulator to fix problems. At the same time, we should fill the gaps in the functional regulation.


  1. No law works if the cops refuse to enforce it. The trick is to have professional regulators who actually believe in the rule of law. Bush's fox-watching-the-henhouse approach was destined for failure. On the other hand, Obama's proposal is too timid, the gambling must be stopped.

  2. Not going to happen. Both parties are controlled by the major bankers. The finance industry is the largest sector of the S&P 500. We went from an agriculture to a manufacturing to a high tech economy to now a banking and health care economy.

  3. Its funny how economists cant see it coming but they absolutely know the solution to solve what has already happened.

    The blind leading the blind.

  4. There are several prominent economist who saw "it" coming, depending on your definition of it. Many saw a major housing bubble/bust. Many also saw that this would be a huge hit to the economy and GDP/employment. A very few saw the implications for the credit derivatives markets, CDS's, investments bank collapses and the overall risk to global financial markets. But much of that was basically hidden away in fancy accounting and/or private OTC transactions. I imagine it would be nearly impossible for any economist not intimately involved in commercial finance to have seen all those risks.

  5. Its funny how economists cant see it coming but they absolutely know the solution to solve what has already happened. The blind leading the blind.

    Well, here's what the first critic quoted here wrote about Fannie Mae and Freddie Mac several years before they failed: