Simon Johnson: A Plan To Keep Wall Street From Blowing Everything Up AgainMay 28th, 2012 4:07 pm Simon Johnson
May 29 (Bloomberg) — There are growing concerns that the regulatory bodies overseeing the financial sector are incapable of understanding, preventing or even properly investigating excessive risk taking that threatens to ruin the economy.
This issue was raised before the 2008 financial crisis and received more attention during the debate that led to the 2010 Dodd-Frank financial-reform law. Some tweaks were made in various parts of the regulatory apparatus, including the governance of the Federal Reserve Bank of New York, to reduce the influence of Wall Street.
In light of the $2 billion-and-counting trading losses at JPMorgan Chase & Co., the issue is back on the table. If anything, the key points have been sharpened both by what we know and don’t know about JPMorgan’s losses. It is time to consider establishing the equivalent of a National Transportation Safety Board for the financial sector, along the lines suggested by Eric Fielding, Andrew W. Lo and Jian Helen Yang. (Andrew Lo is my colleague at the MIT Sloan School of Management.)
In 2008, many things went wrong to create a true systemic crisis. The Financial Crisis Inquiry Commission spent a great deal of time poring over the details; in the end its conclusions split along party lines. In my assessment, deregulation allowed big financial companies to take on and mismanage excessive risks. They blew themselves up at great cost to the economy, and then received arguably the most generous bailout in history.