The Corner

Derailing Financial Reform?

It is curious that the New York Times still fails to see the irony in its condemnation of the banks for risk mismanagement failures while at the same time advocating more authority for the regulatory agencies — the SEC, CFTC, FDIC, Treasury, Fed, and the rest of the ABC soup — that utterly failed to manage risk. In an editorial yesterday, the Times voiced concern that incoming congressional Republicans would “derail” financial reform by cutting off funding for regulatory agencies that are setting new, hyper-restrictive rules for how Wall Street breathes and clips its fingernails.

These are the same agencies that allowed moral hazard to threaten the economy, couldn’t find Bernie Madoff in front of their faces, and failed to see that AAA ratings on subprime debt were a terrible idea. They need more power? Really?

The Times writes: “To their credit, regulatory agencies have begun that process with a sense of mission and depth of expertise that was missing in the years before the financial crisis.”

What expertise? According to a Treasury staffer closely involved in setting up the new Consumer Financial Protection Bureau, they have no idea what they are doing as they set up a billion-dollar regulatory agency from scratch. In their defense, how could they? It is a mission destined for failure. The Commodities Futures Trading Commission has admitted it was ill-prepared to take on the huge tasks given to it by Dodd-Frank and recently announced it would miss some statutory deadlines.

Meanwhile, rising compliance costs are already threatening to shut out some investors and make financial markets less dynamic and competitive.With this in mind Rep. Eric Cantor has argued that Dodd-Frank is a “job killer.” The Times editors incoherently countered that Americans are “furious at the banks, whose recklessness has led to crisis and recession — and high unemployment,” and thus Wall Street should be punished. But the simple reality is that even if American’s are upset at the banks, that doesn’t make the compliance costs of Dodd-Frank and the uncertainty created by the regulatory process any less murderous of employment prospects.

In principle, it would be bad to cut off finding for regulatory agencies ad hoc. We do need them to set the rules for competition and prevent fraud. But the incoming Republicans can play an important role in trying to prevent Dodd-Frank rules from hurting economic growth. Holding hearings to keep regulatory directors accountable will be a good place to start.

Anthony Randazzo is director of economic research at the Reason Foundation in Washington D.C.

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