Smart. Sharp. Funny. Fearless.
Friday, October 28, 2016

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.

Click here for reuse options!
Copyright 2012 The National Memo
  • William Deutschlander

    Simon, you certainly bring to light the obvious!

    The root of the problem, a very serious problem, is POWER, MONEY, GREED and POLITICAL INFLUENCE.

    Unfortunately those same forces played a MAJOR ROLE in the 1929 DEPRESSION as well as the 2008 GREAT RECESSION! It appears to be a fault that POWER and GREED do not desire to resolve.

    • jlelandthomas

      Another A- MEN from me

  • dtgraham

    American conservatives have become defacto libertarians and seem utterly incapable of recognizing that wild west cowboy capitalism could ever go wrong. No regulations are always the answer you know. So, to explain the subprime mess, they’ve reverse engineered this incredible story of how the 1977 community reinvestment act caused everything despite studies to the contrary.

    The financial crisis inquiry commission concluded in Jan. 2011 that the CRA was not a significant factor in subprime lending or the crisis. Most subprime lenders weren’t subject to the CRA. Only 6% of subprime proxy loans had any connection to the law. Furthermore, CRA regulated lenders had half the defaults as non-regulated lenders in the same neighbourhoods. The two GSE’s were minor participants in adjustable rate mortgages and were pulling out of even that in the years before the collapse.

    Economist Stan Leibowitz wrote in the Wall St Journal that the extent of equity in the home was the key factor in foreclosure rather than the type of loan, credit worthiness of the borrower, or ability to pay.

    Granted, it was a complex thing, but the major problem was the new shadow banking system being able to mask leverage levels from investors and regulators through the use of complex off balance sheet derivatives and securitizations. Deregulation allowed them to do this. The U.S. had a sound credit and financial system for close to 70 years after FDR. Glass-Stegall is among other things that are badly needed back.