That’s part of the latest Treasury plan.
The potential gain is that a single agency would be accountable
for all the in-between derivative products which are currently overseen
by no one. Even if you’re a libertarian who hates regulation, a lot of the subsequent oversight (but not all of it) would be enforcement of laws against fraud and false dealing. Some of it would be preventing excess leverage to take advantage of the Fed safety net.
At current margins the gains from regulatory competition are less than before. Arguably the CFTC applies a lower regulatory tax to keep economic activity in one of the sectors it oversees, most notably financial futures, and thus to keep itself in business. This in turn forces the SEC not to regulate stock trading too heavily, otherwise volume will jump into the futures market. All true, but that argument made more sense in the mid-1980s (post Shad-Johnson), when stock index futures were still a novelty with an uncertain future. Furthermore international competition constrains the regulators more today than it did twenty years ago (London would gladly pick up business from the Merc), so that means less need for regulatory competition within the USA.
Ideally a regulatory marriage should focus the resulting agency on its most important roles, namely discovering and penalizing outright fraud and preventing catastrophic meltdowns. Of course that wish might be dreaming. After all, if investors are tricked why will underpaid lawyers see through the underlying problems in the market?
Note also that few regulatory consolidations have gone well, at least not in their first few years. Imagine actually forging the SEC and CFTC into a single culture with a single set of norms and regular communication patterns and employment practices. I’d be surprised if it could be done in less than four years’ time and that is usually with some big bumps along the way, all in the service of learning of course. (Google "Homeland Security.")
So ideally the time to consolidate the SEC and CFTC is when the crisis is truly passed, not today. In the meantime we should recognize that the case for separate agencies isn’t as strong as it used to be. But given that the SEC already has its hands full (did they catch the Bear Stearns problems? No), do you want to divert its talent to managing the merger? I’m not ready to press the "yes" button on this one, even though the final outcome is probably a better place to be. A simpler alternative is to give the SEC authority over the derivatives and fold in the CFTC five years from now.
The SEC is run by socialists who believe it is their job to protect the “little guy”, or what we jokingly refer to as Chuck Schumer’s grandma. The CFTC is run by capitalists because Grandma Schumer isn’t trading interest rate futures on the Chicago Merc. To any market participant, it is obvious that there need only be one regulator; unfortunately it is also obvious that the incompetent, markets hating, heavy handed approach of the SEC will prevail, “little guy” needing to be protected and all that…
Here is what I don’t understand:
If the SEC was abolished (or its power reduced to nothing more than an information-gathering role), what would prevent individual stock markets from competing with their own regulations to attract both investors and firms? I understand the need to punish fraud, but it seems like a lot of what the SEC does doesn’t punish fraud. We don’t have much of any competition in stock markets (I’m guessing because the regulatory hurdle is huge), and it seems like only a market can answer questions such as: “How many reporting requirements do investors demand of public companies?”
If regulations are politically inevitable, why not apply this to other markets? Why not merge the FDA and EMEA? How about the DOT and the European and Canadian equivalents? I’m always surprised environmentalists don’t take note of how many fuel-efficient cars America can’t get imported partially because of stricter regulations on diesel fuel and safety requirements.
It’s not relavent to this discussion, but Charles Stross (noted science fiction author) will be in your town drinking beer tomorrow night at The Brickskeller at 1523 22nd St NW from about 7pm.
See his post at: http://www.antipope.org/charlie/blog-static/2008/03/beer_in_dc.html
Have fun …
From Budapest
Google Martha Stewart to see how the SEC might do its job.
BlackRock CEO Laurence Fink blames the rating agencies for the collapse of Bear Stearns in his interview in Barron’s this week. When they lowered Bear to below investment grade status, this increased the possibility of bankruptcy. He says that the derivative contracts they traded had provisions stating they had to break their contracts if they were downgraded to below investment grade.
My question is, is there some law or regulation that requires these contracts to have such provisions?
On another matter, Krugman is at it again, in his NY Times column today, blaming the lack of regulation (surprise!) for the collapse of the banking system in the Great Depression.
What he doesn’t say, as if he knows, is that the banks collapsed because of state anti-branch banking laws, which were designed to protect local mom-and-pop banks, but which had the disastrous consequences of preventing them from growing and gaining access to the capital that would have stemmed bank runs.
Canada, which had no such restrictions, had no bank failures during this period, and didn’t get stuck with a central bank until 1935.
Even if you’re a libertarian who hates regulation…
I am amused by how often Prof. Cowen starts sentences like this, only to follow with why the libertarian is “obviously” wrong on this particular issue. I realize there are different ranges of libertarian purity (or extremism if you prefer), but there are plenty who think the federal government has neither the authority nor the competence to do anything right. Just stop and think again about what you are saying. You admit that libertarians are correct in their criticism of much of what government does, but you think when it comes to enforcing financial innovation and keeping people honest with their books, that’s an area where politicians will excel? Regulators are notoriously corrupt in other matters, but they will ignore bribes from huge investment banks when contractual integrity is at stake?
the futures exchanges do a pretty good job of mandating margin requirements of their member firms and they are pretty picky about collateral and haircuts unless you are posting tbills for account collateral.
most of the current problems seem to be coming from the over the counter markets. if bear gets downgraded it spirals down. same with enron. if their stock dropped below a certain level they would go in the crapper. these firms used themselves as margin. focus should be there if the taxpayer is going to back you up. no calling a turd a chocolte bar and recording it as such on your balalnce sheet.
i coming from Singapore,To a person 團體制æœhere.
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