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gao- us financial regulatory system outdated January 9, 2009

Posted by Bradley in : Uncategorized , trackback

Not a surprise, as the GAO has expressed similar views before, but yesterday’s GAO Report, Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System states:

As the nation finds itself in the midst of one of the worst financial crises ever, the regulatory system increasingly appears to be ill-suited to meet the nation’s needs in the 21st century. Today, responsibilities for overseeing the financial services industry are shared among almost a dozen federal banking, securities, futures, and other regulatory agencies, numerous self-regulatory organizations, and hundreds of state financial regulatory agencies. Much of this structure has developed as the result of statutory and regulatory changes that were often implemented in response to financial crises or significant developments in the financial services sector. For example, the Federal Reserve System was created in 1913 in response to financial panics and instability around the turn of the century, and much of the remaining structure for bank and securities regulation was created as the result of the Great Depression turmoil of the 1920s and 1930s.

It’s a pretty clear and useful report in general though I’m not so sure about the usefulness of the conclusions. The GAO begins its discussion of conclusions by saying that one of the major problems with the current system is a lack of clarity about the goals of financial regulation. And the example the report cites is as follows:

representatives of some regulatory agencies and industry groups emphasized the importance of creating a competitive financial system, whereas members of one consumer advocacy group noted that reforms should focus on improving regulatory effectiveness rather than addressing concerns about market competitiveness

I’m not persuaded that the real problem has anything to do with a lack of clarity about goals. The sort of untruthfulness about the likely risk of default of assets underlying securities that was a core part of the initial problem didn’t have anything to do with any lack of clarity about the goals of the financial regulatory system.

And this idea that has become so entrenched in debates about financial regulation that it’s necessary to choose between protecting consumers and allowing US financial institutions to be competitive is pretty corrosive stuff. And any debate that proceeds in this way isn’t likely to help us pull out of the hole we’re in.

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