Proposed Regulatory Overhaul: Why are the Foxes Designing the Hen House?

This week’s big financial sector news has been the sweeping proposal by the Fed to overhaul the U.S. financial regulatory system, and give the Fed more power to manage and regulate the financial markets. As usually happens during a major financial crisis, the government looks to solve the problem and prevent future fiscal malaise by creating new regulations. Unfortunately (as is often the case), the problem will probably be long gone by the time the new regulations are implemented, and the new rules may turn out to be largely ineffective and/or replace old problems with new ones due to the letter of the law or the way the regulatory agencies behave.

But there is a bigger problem in this particular situation…

I’m sure I can’t be the only one who sees the inherent fallacy in the argument that more regulations are needed, when the current crop of blind-eye regulators didn’t fully use the tools they already have. It would be one thing if the Fed (and other regulatory agencies) tried to prevent this crisis, and were unsuccessful due to lacking the proper tools. Instead, we had a situation where federal regulators could’ve done more to regulate mortgage lending by insisting on higher lending standards, capital requirements, etc, but stood by and did nothing.

Furthermore, I don’t see how giving more powers to the Fed in order to turn it into a “Financial Super Cop” is a viable solution, when they helped cause the current financial crisis in the first place. Just think about it: the Fed’s low interest rate policy coupled with a blind eye turned towards the financial sector, both contributed to the credit crunch. It’s insanity to think that giving the Fed more power will prevent another major financial crisis, when the Fed helped CAUSE the crisis in the first place.

Isn’t that the functional equivalent to giving the fox the key to the hen house, and asking him to keep the chickens healthy?

Don’t get me wrong - I do think stronger regulations are needed in certain areas, especially around derivatives and mortgage lending. I just don’t see how shuffling around the current crew of keystone financial cops will get the job done. In other words, while I agree that new regulations are needed, perhaps another group of people should be the ones to design and implement it.

Comments

[Mbuna]

Insanity, well of course, that is norm when you have free market hypocrites (Soros calls them (free) market fundamentalists) masquerading as free market ideologists until everything goes wrong. Then of course their true colors become a little more obvious as you may have noticed. Although someone else here on Alpha came up with this phrase I think it is a great way to frame the current mindset of those that hold the financial reins- "privatize gains, socialize losses". It remains to be seen whether this mantra will hold out till the end of the current administration or whether things will get bad enough that there simply won't be enough smokescreen left to be able to feed it to the public.

[User 171895]

Ah. There's a difference b/n free-marketers and "big business." Adam Smith despised big business, didn't trust them.

Bigger q's why this is surprising. The foxes always design the henhouses. That's why free-market types say stop designing henhouses, let people make their own as they see fit.

[SergeBirbrair]

Good point, Markham, good point, but...
I still preffer regulated markets to markets which operate so inefficient that Fed bail out money needed on the regular basis at the cost of billions of dollars to the taxpayers:
www.nothingcontroversi...