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The Left Wakes Up to Financial Regulation

I rather liked Bob Kuttner's list of five questions that Obama's financial regulation plan will have to resolve. A lot of folks will find it a welcome introduction to the financial regulation fight.

I was also interested by this nugget buried in Bob's final paragraph. "Until now," he says, "the main players in this insiders' debate have been the government and the financial industry. A new consumer-labor reform coalition made up of several dozen groups is set to be unveiled on June 16, just before the release of the administration's plan."

Huh. It's good to hear that these groups mean to get involved. But I'd love to know why they decided to wait until the day before Obama drops his draft, rather than forming five months ago so they could have been building support around their principles, and inserting their voice into the administration's process. Various sources involved in this process have complained to me that the only real engagement is coming from Wall Street, because Wall Street is the only group that knows what it thinks financial regulation should look like. This, I think, is confirmation of that view.

By Ezra Klein  |  June 11, 2009; 2:35 PM ET
Categories:  Financial Regulation , Solutions  
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Comments

This is a great link. Here are my preliminary solutions to the link's 5 questions:

(1) No need to further regulate private equity and hedge funds. Simply equalize the tax relationship between capital gains and ordinary income, and equalize the tax treatment between debt and equity. This will not only promote fairness, but also reign in PE and hedge funds.

(2) I think the Fed is best placed to regulate the Too Big To Fail institutions. I agree with Volker that we should simply not allow financial firms to achieve this status by limiting size and leverage ratios.

(3) I wouldn't object to a government mandate that subprime and payday loans be easily readable by ordinary people, but these products should not be eliminated. Doing so would simply cut off credit for poor people.

(4) I see no problem with giving the FDIC authority to close down non-bank financial companies. Alternatively, we can create a new institution. Either way, this is a way better outcome than ad hoc interventions by the Fed or the Treasury.

(5) Clearly more centralized regulation is needed for the derivative markets. We need to be very careful that the regulation not eliminate these markets though.

As an addendum, I think we should repeal the '33, '34, and '40 Acts, and start over with respect to what forms of financial regulation should exist in the modern world. For example, do we still need every prospectus to have 40 pages stating that investing is risky? Do we need to keep limiting risky investments to high net worth individuals? Does the Board model for mutual funds make any sense, when investors can just walk away if returns are sub-par? Inevitably after any crisis, hordes of regulation will ensue. Some of this regulation is wise, some of it is unnecessary, and some of it is harmful. And most of it remains on the books forever, thereby enriching lawyers and accountants at the public's expense.

Posted by: Dellis2 | June 11, 2009 3:28 PM | Report abuse

Why haven't consumer & labor groups been more visible before, like the financial services industry? It's simple. They don't have the financial services industry's nearly-infinite resources.

Duh.

Posted by: Apt604 | June 11, 2009 6:34 PM | Report abuse

As I've seen it a large rallying point for the emerging "labor-consumer" coalition has been Elizabeth Warren's proposal for the Financial Product Safety Commission - see the 50 something signatures on the endorsement of the bill for the paper trail of the coalition forming. That was only two or so months ago, which I think explains some of this delay.

Posted by: RPChang | June 12, 2009 10:05 AM | Report abuse

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