Saturday, March 20, 2010

Financial REform?

On March 18, 2010, Christopher Dodd, Democrat Chairman of the Senate Banking Committee unveiled a long awaited proposal to reform America's financial system.  The many elements include some moves back to Glass-Steagall, the repeal of which has been viewed as responsible for the financial system meltdown. 

A more critical proposal involves the creation of a Financial Stability Oversight Council whose job is to flag large firms for special oversight by the Federal Reserve, which is likely to result in 'too big to fail' moral hazard. Large firms will also be required to pay disproportionately into the resolution account for rescuing failing firms, which may lead to the break up of full service financial firms (Citicorp, JP Morgan,...) into smaller, specialized businesses.

It it difficult to dispute the necessity for financial system reform.  However, the imposition of yet more government onto an already complex system will only create opportunities for more obsfucation and gaming.  The path to reform should result in simplification and transparency (not comlexity) to create information symmetry so that consumers and investors can make informed choices. Transparency will discipline errant banks by revealing their bad decisions early on. 

While the spirit of Mr. Dodd's reforms is right, the methods he proposes fertilizes the seedbed for the next meltdown.

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