Everybody's talking about the need for changes in the U.S. financial regulatory system. This week the U.S. GAO released its framework for crafting and assessing modernization proposals. First the report highlights the major problems with our current system:
- Regulators have often failed to mitigate systemic risks posed by large and interconnected financial conglomerates and to ensure they adequately manage their risks.
- Regulators have had problems addressing financial market problems resulting from activities of less regulated markets -- non-bank mortgage lenders, hedge funds, and credit rating agencies.
- New and complex investment products have not been adequately monitored or even understood.
- Standards set by accounting and financial regulators have not kept up with financial market developments.
- Attempts to coordinate internationally with other regulators have been difficult because of the fragmented U.S. regulatory structure.
Actually it's this fragmented structure that is at the root of all our problems. Today, we have almost a dozen federal banking, securities, futures and other regulatory agencies. The Federal Reserve System was created in 1913 and most of the remaining agencies were created in response to the Great Depression. Now that we seem to be nearing that same type of financial devastation, we need to reconsider that entire regulatory structure.
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