A Flawed Blueprint

A Free Market Analysis of the Treasury Department’s Financial Regulation Proposal

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The Treasury Department’s 202-page Blueprint for a Modernized Financial Regulatory Structure offers a sweeping vision for remaking America’s financial regulatory landscape. It promises to replace a vast array of financial services agencies, overseers, and regulators with three enormous bureaus—one of them an expanded version of an existing government entity—with sweeping powers to reach into every corner of the American economy.

The report seeks to replace a confused, sometimes inconsistent financial regulatory system with a clearly defined one that would bring a strong regulatory state to bear over many financial institutions. It discards institutions, forms, and ideas that have grown up organically in response to specific problems and replaces them with large, one-size-fits-all regulatory mechanisms structured along functional lines. Although certain portions of the framework have considerable merit, particularly regarding insurance regulation, many more of them have serious flaws.

This paper analyzes the Blueprint from the basis of how it advances the principle of regulatory competition—that regulation works better when a degree of choice allows private entities to select their regulators and when those regulators evolve as a result of long, learned experience rather than commands issued from on high. This analysis seeks to offer guidance to policy makers interested in strengthening free market institutions.

The first section briefly analyzes the Blueprint’s short term recommendations. Two longer sections look at the medium and long-term recommendations. The conclusion outlines some considerations going forward.