Has Anything Really Changed on the Regulatory Landscape Since the Financial Crisis?


Regulators and legislators have not fixed the problems in the financial system that led to the financial crisis of 2008, according to Kenneth Rogoff, a professor of economic at Harvard University. In addition, regulators are in something akin to an “arms race” that they have no hope of winning, according to Professor Rogoff (“Rogoff: Financial Regulation Is An Arms Race That The Government Can Not Win,” www.businessinsider.com). As the regulators in their Chevies try desperately to catch up with the Ferraris in the race, the banks pick off their more experienced personnel with ease, offering them five times as much as they can make working for the government.

While the dangers may have receded because key players still remember their “near-death” experience in 2008, Wall Street will ultimately return its pre-meltdown recklessness, Rogoff believes. The flaws in the financial system have not been adequately addressed because of the familiar problem of lack of political courage/will and lack of “intellectual conviction needed to return to a much clearer and more straightforward system.”

Banking regulations have morphed from being short and simple to “mind-numbingly complicated statistical algorithms for measuring risk and capital adequacy,” Rogoff writes. For example, the entire Glass-Steagall Act of 1933, which was effective in separating stodgy commercial banking from riskier investment banking, is contained in 37 pages. Dodd-Frank and its regulations are expected to fill 30,000 pages (if they are ever completed).

As the financial system has become more complicated, regulators have adopted more complicated rules. But the complication largely dilutes the strength of the rules. Professor Rogoff points to the Volcker Rule as an example of that. The Volcker Rule basically separates commercial banking from risky proprietary trading. But the simple idea has been diluted by hundreds of pages of legalese as it winds its way through the legislative process.

The best solution, Rogoff says, is to adopt a proposal that would require firms to fund themselves with equity rather than debt financing. Some very large firms, such as Apple, have almost no debt, he says. To protect the financial system, which overdosed on leverage and has been trying to de-leverage since the 2008 crisis, banks should not be allowed to over-leverage.

Rogoff notes that the banking industry argues that such requirements would “curtail lending, but this is just nonsense in a general equilibrium setting,” he writes. Nonsense. That is a bold assertion by an apparently serious and informed person. It is tantamount to saying that bankers and their lobbyists are engaging in deception for the purpose of misleading people.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.