There is some logic in the plan being discussed to change the way financial markets are regulated, but there is also much to be concerned about. While the details of the plan have not been released, the true value of the legislation will come in its perspective.
The correct perspective should reflect the best interests of the public, and not the institutions and businesses that make up the system.
Which is not to say change is not warranted. The companies that make up the financial system have changed greatly in the last 20 years, while the system of regulation has not seen a similar revision. A streamlining of that process to give a better picture of the business overall could be a good thing, particularly if it includes the transparency necessary for the public to understand the full nature of a company.
But it's important not to confuse the important roles each agency has. The processes of monetary policy, financial regulation, public company regulation and securities regulation all are different. Regulation of one area should not be sacrificed to help another -- particularly in the area of securities where a small number of people can control the distribution of the nation's wealth.
Banks and thrifts are examples of how all these entities are inter-related. Banks once loaned money largely based on their deposits and money they could borrow from the Federal Reserve at attractive interest rates. In a very simplified view, the Fed could set monetary policy and carry it out by altering the various funds it makes available to banks.
But banks and thrifts are now one. They also have access to capital generated in the securities markets that help fund the loans. Those loans are routinely bundled into new securities products which have their own markets. Banks also use the securities markets to improve earnings on their deposits, going beyond what was the more traditional bond markets were interest rates and returns were more stable.
There are also major sectors of the system with no regulation. More than 50 percent of the subprime loans that caused the most recent financial problems were made by mortgage brokers which get no federal regulation and scant state oversight.
Treasury secretary Henry Paulson notes these changes in the executive summary of the plan saying, "... securitization allows the holders of the assets being securitized better risk management opportunities and a new source of capital funding; investors can purchase products with reduced transactions costs and at targeted risk levels. Yet, market participants may not fully understand the risks these products pose."
This labyrinth certainly calls for a more sophisticated regulation, with not only full disclosure of the risks and participants involved, but with requirements that these issues be spelled out in clear, non-legal language for those buying products. Anyone buying a house knows what this kind of disclosure this involves -- reams of papers outlining all aspects of the transaction with signatures required.
In the end, whether it's a common real estate transaction or the purchase of more complicated and risky securities product, consumers have to make their own decisions about what's right for them. They can only do that if the information is available and if regulators' goals are to put public protection at the top of their priority list.
-- Jim Grinstead
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