Column : Mr President, you wasted a crisis

Font Size

Print

Feedback

Email

Discuss

: The US has long had one of the more awkward systems for financial regulation in the world. A gigantic insurance company like AIG was regulated by the state government of New York. Every advanced economy has a unified regulator dealing with all organised financial trading, other than the US where this is split between two agencies — the SEC dealing with the spot market and the CFTC dealing with the derivatives market. Banking regulation is balkanised between multiple agencies and included a considerable role for state governments. Housing finance is distorted by having large PSUs performing social functions. The credit rating business is riven with conflicts of interest. It is perhaps not surprising that the financial crisis of 2008 erupted, given these mistakes in the functioning of the regulatory regime.

In monetary policy, the world has moved towards enshrining the independence of central banks in law, at the same time narrowing their role to monetary policy, requiring transparency and setting up the accountability mechanism of inflation targeting. In the US, the law governing the Federal Reserve was written before these issues were understood. This has implied weaker independence provisions and greater confusion about the goals of the agency. The Fed has moved towards de facto inflation targeting, with only a weak legal foundation for doing so.

The broad contours of US financial regulation fell into place in the 1940s. With a once-in-a-century financial crisis winding down, this should have been an ideal time to comprehensively think about the nature of financial regulation that is required for the 21st century. After all, a crisis is a terrible thing to waste. Unfortunately, the mechanisms of governance in the US are not very good at grappling with problems and coming out with new legislation. The lawmaking process is cumbersome, and littered with roadblocks thrown up by special political interests. When Barack Obama won the presidency, there was hope that his immense political capital would be put to the purpose of reforming US financial regulation. However, the power of the president has been significantly attenuated in the last seven months.