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Strengthening Regulation Must not Falter

Reuters reports today that because of Scott Brown's win in the Massachusetts special election it will be more difficult than ever for Democrats to win Senate passage of their proposals to tighten bank and capital market oversight. The definitive election of Republican Scott Brown in the election yesterday may have given right wing talk show hosts reason to gloat. But just because the backlash over health care reform handed them a victory does not mean the government should waver in its determination to reform the regulation of financial markets. The Financial Crisis Inquiry Commission, which included FDIC's Sheila Bair and SEC's Mary Schapiro, told Congress only Monday that regulation needed to be tightened. Schapiro fingered lax regulation of asset-backed securities, an excessive reliance on credit rating agencies, executive compensation that encouraged unhealthy risk-taking and a failure to oversee hedge funds and private equity funds as the culprits, according to the New York Times. The regulation of OTC derivatives is still high on the list of those in charge, even as the use of them is again on the increase. (Derivatives pricing service SuperDerivatives said it expects volumes for FX, interest rates, energy, and commodity derivatives to soar this year.) Unless the excesses of the past ten years or so are curtailed, the banks will head straight back to their old ways and securitize the hell out of things that should not be securitized. Foreclosures in the US continue to skyrocket as a direct result of securitizing sub-prime mortgages. The pain in the housing market has not yet even subsided, and yet Republicans call for a return to the free-wheeling ways of the past. It must not be allowed. Markets can and will be better monitored and controlled in ways that leave players free to innovate. Regulation should not be a political football.


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