Bringing the financial industry within bounds

April 26, 2010 at 11:33 am | Posted in Economy, politics straight up | Leave a comment
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Federal Reserve Building, Constitution Ave., Washington, DC (Library of Congress)

I have been having a bit of trouble ratcheting up any enthusiasm for the floridly named “Restoring American Financial Stability Act of 2010” (S.3217). There seems to me to be altogether too much vagueness and not enough actual regulation.

Numerian has an illuminating post suggesting the following points which are fleshed out in detail over at The Agonist:

  1. A bank license should be extended only to those financial institutions that are in the business of lending, not the business of broking or securities underwriting.
  2. A bank should not be allowed to engage in broking or securities underwriting.
  3. A bank may conduct trading only in the service of its clients, not as a stand-alone speculative venture or for the purpose of structuring complex deals.
  4. No bank should be too big to fail.
  5. All derivatives need to be traded on registered exchanges, with daily publication of marks and transparency of open interest.
  6. To be truly independent, the risk management function in financial institutions must report to the board of directors.
  7. Hedge funds and private equity businesses must be regulated by the government.
  8. The Federal Reserve regulatory function should be abolished.
  9. The revolving door between government and financial companies must be constrained.
  10. No financial company may lobby the Congress.

Apparently much could be accomplished simply by reinstating the Glass-Steagall Act of 1933, which would prohibit banks from owning and trading risky securities, but last October the Obama administration put the kibosh to it, although they are now talking about “limiting” that kind of activity.

UPDATE: Yeah, what Ed said.

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