Monday, March 9, 2009

Financial Regulations

by Richard Crews

It is puzzling that the Obama administration has not come forward with a comprehensive new set of rules and regulations for the financial industries. Clearly the current worldwide economic meltdown is due, at least in major part, to distortions and excesses in banking and other financial practices. These are the result of greedy and amoral, moneyed people with exciting new toys and tools provided by computer and communications technologies, leading to these people "gaming," for personal excitement and gain, an outdated and under-supervised set of laws.

Over the past few decades is has been impossible for government regulation and supervisory sanity to keep up with the rapidly evolving, innovative complexities of transnational finance. A political philosophy of deregulation and small-government has been coupled with fiscal constraints to produce a dysfunctional system.

But these developments are not new or surprising. Thousands of brilliant minds in government, academia, and business have been watching and wondering about their evolution for many years. Now that the worldwide financial pot has come to a boil--has, in fact, boiled over--where are all the "good ideas" that have emerged over those years?

There are several impediments to implementing new rules and regulations for the financial industries. For one thing, there are many disparate, vested--and heavily invested--interests; from politicians and bankers to business people of many ilks, there are powerful people with adversarial points of view. For another thing, the game keeps changing; the nigh-miraculous developments in information technology and the "creative" experiments, realignments, and liquidity they foster mean that would-be regulators are always shooting at a moving, changing, rapidly receding target.

These factors suggest both a format for new regulations and a process for implementation. The format should be top-down or extensional, proceeding from general principles to evolving specifics. One cannot define (particularly in advance of clever minds and dramatic new technologies) all the specific regulations the future will require; but one can set general principles. For example:

(1) all assets and liabilities should be "on the books"--none may be carried in secret corners of arcane ledgers

(2) and they should all be "marked to market"--if they cannot be competitively priced in open markets, they cannot be carried on the books or by an institution

(3) an institution's assets and liabilities must be balanced or diversified--no single vehicle or transaction device can amount to more than a certain percentage of the net worth of the institution

(4) no single institution may be so big that's its demise would destroy the system--the "too big to fail" or anti-monopoly principle

(5) etc.

Of course there are problems--terribly difficult problems--specifying and implementing such principles. And the processes and results for specifying and implementing them must be amenable to change. But, just as the U.S. Constitution led to a specifying and implementing (and eternally evolving) body of laws, so it is necessary to start with general principles for responsible financial regulation.

As to the process for implementation, the early experiences of the Obama administration (and related history) have clearly shown that ALL stakeholders must be involved from the earliest throes of development. Legislators, business people, and academics must all have their say from the start, both because they may contribute good ideas, but also because that is the way to get them connected and committed to the necessary changes. What Obama has called "summititis"--starting off with broad summits on health care, the environment, energy generation and transmission, etc.--is key to having the process lead to effective results and implementation later on.