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If only we could get some REAL financial reform

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March 16, 2010 – Comments (2) | RELATED TICKERS: AIG , GS , C

As I make clear in my article on Fool.com today, I am none too pleased with the direction that financial reform has gone.

Is it better than nothing? Maybe, but I'm not really sure about that. The problem is that we already had oversight bodies and bureaus and whatnot before and during the panic and meltdown. They all seemed to get caught up in the same euphoric cloud as everyone else and they either misread cues or looked the other way entirely. 

In other words, the same human failings that drive everyone in the private markets to bubbly extremes impact the judgment of the regulators that are supposed to put the brakes on. 

There's no absolute solution to the problem of bubbles and crashes, but it doesn't seem to me that leaving it up to ill-defined, in-the-heat-of-the-moment human judgment is any different than what we already had. What we needed were some new rules, set out explicitly in black and white that would fix the worst leaks that led to the crisis. 

As it is, I'm not only not confident that the new system will prevent some novel bubble and panic, I don't think it would address what we've been through if it happened all over again.

Matt

2 Comments – Post Your Own

#1) On March 16, 2010 at 4:51 PM, outoffocus (23.46) wrote:

Why do we need new rules when we don't enforce the rules we already have? Seems to me that the only thing new regulation is going to do is give more power to the very bodies we dont want having it.  Enforcing and allowing the system we had in place to work would have been the biggest deterrent to any of the shenanigans that led up to the recession. It would have been painful but we would have learned our lesson quickly and started adopting more prudent measures.  Instead we reinforced the bad behaviors.

Answer me this, how can the same government body that caused the moral hazard get rid of it?

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#2) On March 16, 2010 at 6:59 PM, TMFKopp (96.79) wrote:

"Answer me this, how can the same government body that caused the moral hazard get rid of it?"

Yes, that's true. But the the system as it currently stands gives too much leeway to banks -- which aren't market-based entities to begin with. The problem was giving the overseers power and saying basically "do what you think is right at the time." Sorry, but we've proven that doesn't work. 

Private market participants aren't the only ones that get caught up when the market gets too exuberant. For regulators there suddenly seems to be reason to let balance sheets get too unwieldy or for low-quality loans to be A-OK.

This is the time to set down new rules (if we haven't already missed the window). By the time the economy starts revving back up again, the chorus of "don't stifle growth" will come up every time we try to reign in dangerous practices.

Matt

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