Home > Uncategorized > Ending the Financial Arms Race by Kenneth Rogoff – Project Syndicate

Ending the Financial Arms Race by Kenneth Rogoff – Project Syndicate

September 16, 2012 Leave a comment Go to comments

Yes, the chances of an immediate repeat of the acute financial meltdown of 2008 are much reduced by the fact that most investors, regulators, consumers, and even politicians will remember their financial near-death experience for quite some time. As a result, it could take a while for recklessness to hit full throttle again.

CommentsBut, otherwise, little has fundamentally changed. Legislation and regulation produced in the wake of the crisis have mostly served as a patch to preserve the status quo. Politicians and regulators have neither the political courage nor the intellectual conviction needed to return to a much clearer and more straightforward system.

CommentsIn his recent speech to the annual, elite central-banking conference in Jackson Hole, Wyoming, the Bank of England’s Andy Haldane made a forceful plea for a return to simplicity in banking regulation. Haldane rightly complained that banking regulation has evolved from a small number of very specific guidelines to mind-numbingly complicated statistical algorithms for measuring risk and capital adequacy.

CommentsLegislative complexity is growing exponentially in parallel. In the United States, the Glass-Steagall Act of 1933 was just 37 pages and helped to produce financial stability for the greater part of seven decades. The recent Dodd-Frank Wall Street Reform and Consumer Protection Act is 848 pages, and requires regulatory agencies to produce several hundred additional documents giving even more detailed rules. Combined, the legislation appears on track to run 30,000 pages.

CommentsAs Haldane notes, even the celebrated “Volcker rule,” intended to build a better wall between more mundane commercial banking and riskier proprietary bank trading, has been hugely watered down as it grinds through the legislative process. The former Federal Reserve chairman’s simple idea has been co-opted and diluted through hundreds of pages of legalese.

CommentsThe problem, at least, is simple: As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. It is an arms race that underfunded government agencies have no chance to win.

CommentsEven back in the 1990’s, regulators would privately complain of the difficulty of retaining any staff capable of understanding the rapidly evolving derivatives market. Research assistants with one year of experience working on derivatives issues would get bid away by the private sector at salaries five times what the government could pay.

via Ending the Financial Arms Race by Kenneth Rogoff – Project Syndicate.

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