Chainsaws and Controls

Regulation of Wall Street is a topic nearly certain to get both liberals and conservatives fired up. In Tuesday’s reading, Krugman mockingly referred to a photo-op of Bush administration officials taking clippers and chainsaws to Wall Street regulations. Krugman warns about the consequences of deregulation and, more importantly for him, the absence of regulation for many financial institutions in the first place. But reading this reminded me of an Economist article that I read last month about excessive regulation of Wall Street. The article, “Law and Disorder,” expresses concern that lawsuits and fines from regulatory agencies in all directions are bombarding banks. How is it that, simultaneously, some see Wall Street as an uncontrolled monster while others view it as chained to the ground?

The answer to this question is most likely that regulating complex financial institutions requires complex language and a complex bureaucracy to interpret and enforce that language. The regulatory structure of Wall Street, as Krugman argues, needs to constantly evolve with the structure of financial institutions themselves. Otherwise, a shadow system is able to operate (quite dangerously) outside of established rules. The regulations that guide the behavior on Wall Street may seem hefty, but that is to be expected with the development of an increasingly complex financial system.

But the Economist article raises an important point about who enforces these numerous, complex regulations. It produces a long list of regulatory agencies responsible for overseeing the activities of American financial firms. In many cases, the author argues, these agencies duplicate punitive action. This not only leads to a wasteful allocation of resources, but also a disorderly regulatory structure. If responsibility for overseeing a certain activity is spread among numerous disconnected offices, the accountability of each of those offices is likely to diminish.

Steps should be taken to enhance interagency communication and to develop more effective means of cooperation. In addition, the regulatory system should be examined holistically to determine where gaps exist and where duplicity of functions is wasting resources. But overall, I agree with Krugman that Wall Street is a complex machine demanding extensive and adaptable parameters. The notion that financial institutions should be allowed to operate outside the purview of regulation neglects to consider the integral role that these institutions play in the overall health of the economy. They have the ability to send the economy into a tailspin and thus, regulation is necessary to ensure that they are not taking on excessive risk or engaging in other precarious actions. 

For Economist article, see:

http://www.economist.com/blogs/charlemagne/2012/11/reforming-french-economy?fsrc=scn/tw/te/bl/arudeawakening