To Regulate Or Not To Regulate Is Not The Question

How to regulate is the question. The very mention of the subject stirs contention. The people scream for strict regulation while Wall Street fights tooth and nail against any type of regulation. This time, for a change, Wall Street will not get what it wants. They went too far and even free market supporters are admitting the need for some kind of regulation.

So the question becomes how much and what kind of regulation will really work? We know, looking at our legal system and the tangled convoluted muddle we have made of it, that you cannot cover everything no matter how hard you try or how many laws you write. And the more regulations we put in place the harder it is to police them. We need a new approach.

First, of course, commercial banks, investment banks and brokerages need to be separated again and legislation passed prohibiting merging and consolidating their ownership. This time the legislation needs to contain stringent rules for rescinding or changing this prohibition. It is imperative to ensure that never again will it be possible for someone like Phil Gramm to slip deregulation into a huge bill in the middle of the night. Regulation of financial institutions is so essential to the health of our economy and our country that repealing it needs to require a stand-alone bill to guarantee it cannot be done in secrecy.

Once these safeguards are in place we start looking at how to regulate the actions of the financial institutions. We have already learned that no matter how many things we prohibit it is guaranteed that one of the clever people will find a way around it, over it or under it. Perhaps the answer is to set regulations from the other direction – a universal negative. Regulations would list what the institutions can do instead of what they cannot do. Enacting any type of transaction not on the list would be a prosecutable offense. In other words, if it isn’t listed the answer is a universal NO you can’t do that.

If, or more likely when, the time comes that a financial institution wants to add a new type of transaction to their list, the bank or brokerage would have to prove the need for it. The request for an addition would be presented to and approved by the appropriate regulatory agency. In addition to limiting risky transactions, this should eliminate the problem we are currently experiencing of having transactions that are so complicated no one really understands them. You cannot explain the need for a transaction if you don’t understand it.

Another area that calls out for reform is the current system of bonus payments now showing up under the euphemism of “retention award” payments. There is nothing wrong with people earning a bonus for good work. But when that work produces short term profits without concern for long term consequences it doesn’t qualify as “good work.”

The clever people, the so called best and brightest, used their gifts for their own enrichment and that of their bosses. They certainly have the right to benefit from their efforts but not at taxpayer expense, and not at the expense of the economic welfare of our country. We need the simplest regulatory system possible. We need rigorous oversight of that system by an agency with strong enforcement authority. We need to make sure this never happens again.