Last Friday, the President issued an executive order on what he called “core principles” for regulating the American financial system. They are:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
These principles are welcome. As I said in my statement reacting to the order, they remind us that the financial system exists to benefit Americans by providing investment opportunities to grow our wealth and make it work for us, however little we may have to start with. It enables us not just to bank our money, but get access to credit when we need it and to provide capital for other Americans to work with.
Regulation of the financial system should not interfere with, and if possible it should promote, the smooth running of that system. Instead, as I said, current financial regulation proceeds from the warped idea that the financial system exists to exploit us and steal our wealth.
Indeed, financial regulation since the Enron crisis has been more about box-checking and compliance aimed at stopping the last crisis from happening again than it has been about ensuring the liquidity needed to smooth the running of free enterprise. We see this in the vast number of rules that were authorized by the Dodd-Frank Act of 2010. By its fifth anniversary, that 800-page bill had spawned 22,296 pages of regulation, representing 75% of the regulatory work of the financial regulatory agencies (CFTC, SEC, FDIC, Federal Reserve, OCC, and CFPB) in that time period.
Increasingly, moreover, the regulations attempt to guard against potential abuses by closing off avenues of financial opportunity. Rules aimed at stopping purported harm from payday loans would cripple the industry, leaving vulnerable people without access to credit when they need it most. Rules aimed at making sure that people can take finance companies to court would massively increase costs for people who would prefer arbitration. The first principle suggests that these rules overreach, and that people should be allowed to make the decisions on whether or not to use these services themselves.
As for the second principle, CEI has long argued that competition offers a better solution to the “Too Big to Fail” problem that the second principle aims to address. Competition is better fostered by regulatory permission than by dirgisime.
The third principle is also welcome, as moral hazard and other factors clearly played a role in the financial crisis. Deposit insurance, for instance, encouraged depositors to ignore problems with their banks on the basis that their savings were guaranteed, while it encouraged banks to take more risks than they would have taken otherwise. These factors need to be weighed in to a proper analysis of the effects of financial regulation.
While financial regulation should not be about ensuring that American companies have a leg up on foreign competitors (that would be mercantilist), it should not end up driving trade overseas. For instance, even before the financial crisis added so much regulation, the then Labour Party Mayor of London, Ken Livingstone, credited the post-Enron Sarbanes-Oxley law with bringing business to the City of London. His director of economic policy told the Financial Times in 2007, “We do not have the onerous and increasingly erratic regulation of the US…I don’t think Sarbanes-Oxley is even the worst aspect of it, and nor do the companies I have talked to. It is the litigious and apparently arbitrary culture of regulation and policy.” That culture has not changed, as the recent heavy fines on European financial institutions shows, so the fourth and fifth principles will be welcome if they succeed in leveling the field.
Finally, accountability in government is one of the hallmarks of the American constitutional framework. Yet financial regulators are in some cases insulated from accountability. This is particularly the case with the Consumer Financial Protection Bureau, which is why CEI is suing to have it brought back within the framework. If the administration uses its powers under the Constitution to bring this rogue agency to heel, American consumers will be well-served.
Financial regulation needs to be redesigned to get the system moving again. Too many Americans have been stopped from getting the financial services they need since the financial crisis. If the administration is successful in redrawing the rules according to these principles, America’s people and businesses will flourish financially once again.