James Pethokoukis

Politics and policy from inside Washington

Watching the watchmen

June 17, 2010

A good piece on financial regulatory reform over at VoxEu:

Furthermore, the bill does not address the risk of political capture. The same politicians calling now for stricter lending standards called for extended home ownership only a few years ago. The future roles of Fannie Mae and Freddie Mac are notably absent from this Bill, and neither is the issue of mortgage subsidisation being addressed. And there seems to be rather more political oversight than less. While accountability of regulators is important, the line between accountability and capture is a thin one.

Will the new framework help prevent the next crisis or at least reduce its probability significantly? The answer is a firm no, not because the reform steps are damaging or wrong, but simply because they only provide the framework, within which the different actors and most importantly regulators, central bankers, and politicians will act. As shown clearly on this site by Ross Levine (2010), it was the violation or intentional ignoring of rules that led to the build-up of the bubble and the subsequent bust, not the lack of regulatory power or proprietary trading.

Me: Thus all the concern about regulatory discretion …

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