Regulations, regulators & financial turmoil

Public outcry & the legislative rush to increase government regulations over financial institutions imply that such oversight has been insufficient & that more is needed to avoid future catastrophes.

But suggestions that the financial sector in the US or elsewhere has been under-regulated seems to describe some alternative universe, unlike the one we live in.

In the case of the US, there are many government agencies that oversee the US financial sector & these entities consume enormous resources in public-sector spending or private-sector compliance.

Consider a few: Federal Deposit Insurance Corporation (FDIC); Office of the Comptroller of the Currency (OCC); Board of Governor of the Federal Reserve System (FRB); Federal Financial Institutions Examination Council (FFIEC); Federal Reserve Regional Banks; individual state bank regulators & conference of state bank supervisors

And there are various agencies involved with long-term financing, including the Federal Home Loan Banks, the Federal Housing Administration (FHA), the Government National Mortgage Association (GNMA, aka “Ginnie Mae”) & the Department of Agriculture’s Rural Housing Service & Rural Development Guaranteed Loan Program.

Also, there is Federal National Mortgage Association (Fannie Mae) & Federal Home Loan Mortgage Corporation (Freddie Mac), government-sponsored entities with implicit (now explicit) guarantees of their debt so they became “too big to fail”, something that would not have happened if paid market interest rates.

It would seem that there was more than sufficient regulation.

Then there is an oft-repeated claim that a single act, the Gramm-Leach-Bliley (GLB), set the conditions for the eventual financial collapse. For its part, GLB repealed a provision of the Glass-Steagall Act (GSA) that had banned affiliations between commercial & investment banks. (It also allowed banking institutions to provide more services, including underwriting & other dealing activities.)

But most of the problems were with investment banks rather than commercial banks. Bear Stearns, Lehman Brothers & Merrill Lynch were investment banks & AIG is an insurance company with no commercial banking division.

As such, GLB probably reduced taxpayer liabilities by allowing commercial banks to take over troubled investment firms with JP Morgan buying Bear Stearns & Merrill Lynch bought by Bank of America.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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