Financial Regulation Must Increase -- But By How Much?

Few argue that we need less financial regulation these days. Consensus seems to be more oversight of the financial system is in order.

The real question is how much? Do we go back to the Franklin Roosevelt days, when The Banking Act, also known as Glass-Stegal, and other stringent measures clamped down on excessive banking activities, increased transparency, and helped Americans regain trust in financial institutions?

Harvard Business School professors Thomas McCraw and David Moss offer two perspectives.

Writing in The New Republic under the headline Regulate, Baby, Regulate, McGraw argues an era of deregulation that started with President Reagan (and aided by President Clinton) dismantled the strong regulatory framework set by Roosevelt following the great depression. Over the last few decades agencies such as the SEC, the Fed, FDIC, and Comptroller of the Currency have been starved of resources and talent.

“If we don’t reinvigorate regulation as well, the credit system will remain sick, banks won’t fully recover, and investors and borrowers will keep on believing — correctly – that they’ve been hoodwinked and fleeced,” McGraw writes. “Only a thorough repair of the agencies that handle securities and banking regulation — a repair FDR’s model can help us achieve — can prevent new crises down the road.”

Moss proposes in a recent working paper that some institutions need more oversight than others. These are the “systemically significant” firms that “if they fail would cause considerable damage to the rest of the financial system and the rest of the economy.” Listen to a podcast with Moss from HBS Working Knowledge.

These institutions would be identified from the beginning and regulated on a continuing basis to prevent excessive risk taking and liability, Moss proposes. Remaining financial institutions would flourish under less stringent boundaries, allowed more freedom to to innovate.

So where do you come down on the financial regulation spectrum? What regulations or policies would you like to see in place?

source : bnet.com