Regulation without Reason The Group of Thirty Report

My friend Peter Wallison has written a critique of the The Group of Thirty Report on the financial crisis.  In particular, he is indirectly critical of the report’s authors — including former Fed Chairman Paul Volcker — calling the work “disconcerting.”

Excerpt and link below:

Regulation without Reason
The Group of Thirty Report
Peter J. Wallison
January 2009

For months, the media have been predicting that a strong new regulatory flux would emerge from the financial crisis. Now, with a new report by the dirigiste wing of the Group of Thirty (G30), we know what the future could look like. A good summary is that bank-like regulation would be spread beyond the banking industry. But there’s a problem: banks have been tightly regulated for years, both in the United States and Europe, and of all the institutions hurt by the financial crisis, they are in the most trouble. How do the bankers, academics, and financial policymakers who make up the G30 deal with this? They don’t. In the wake of this report, the principal question that Congress, the Obama administration, and the American people should ask is why regulation should be extended to most of the major players in the financial system when it has been a consistent failure for banks.

Just before the inauguration of President Barack Obama, a subcommittee of the G30, a private organization of international financial experts, published a report setting out a series of recommendations for regulatory reform in the wake of the financial crisis.[1] Because the head of the subcommittee was Paul Volcker, an adviser to President Obama, the Washington Post immediately suggested that its recommendations were a forerunner to what the Obama administration would propose, calling it “the first hint of the kind of changes to the financial system President-elect Barack Obama might push for in the coming weeks and months.”[2] We should all hope that greater thought and imagination goes into the Obama administration’s proposals on financial regulation, whatever they may be.

The report is unusual in that it consists almost entirely of background discussion and recommendations, without any underlying analysis or justification for its proposals. The idea that far-reaching recommendations can be made without any analytical support–based, apparently, solely on the credentials of the authors–is disconcerting. And the recommendations are indeed far-reaching. Among them:
•    Special regulation of “systemically important banking institutions”
•    “A framework for national-level consolidated prudential regulation and supervision over large internationally active insurance companies”
•    Reorganization of money market funds as “special purpose banks” if they offer transaction features
•    Special prudential regulation of “systemically significant” private pools of capital (such as hedge funds and private equity)
•    A special legal regime that would provide regulators with “authority to require early warning, prompt corrective actions, and orderly closings of regulated banking organizations, and other systemically significant regulated financial institutions

These are recommendations that could profoundly reshape the U.S. financial system–and not for the better.

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