One bonus of speaking at the Global Financial Services Centres Conference in Dublin earlier this week is that I got to listen to Paul Atkins, a former Commissioner at the Securities and Exchange Commission. Unlike many others who have served in that role, Paul understands economics and recognizes the limited value of government regulation. Here’s and excerpt of what he had to say in the Wall Street Journal a few days ago about the so-called reform legislation being pushed by the White House and Hill Democrats:
The centerpiece of this legislation includes creating a group of officials to regulate “systemic risk.” Unfortunately, instead of advancing transparency and empowering investors, it will do very little to address systemic risk, while adversely affecting many of America’s most successful non-financial businesses. In fact, combined with other provisions of the bill, government officials will be in a position to substitute their judgment for that of investors. …The fundamentally wrong conclusion…, now seized upon by the Administration and politicians on both sides of the aisle, is that another, cleverly designed government institution is the prescription for our present ills. Given that most of the “bailed out” institutions were the most tightly regulated, even in terms of capital standards specifically designed to prevent the kind of bank run we witnessed, the “safety and soundness” approach to bank regulation itself needs to be reexamined. The end result of this traditional regulatory approach is that government bureaucrats tightly control the information that investors can learn about a financial institution, limiting proper analysis. …The bill proposed by Senator Christopher Dodd, along with the Treasury and House versions, simply doubles down on this same approach. The proposals seek to extend bank-style regulation to any American company that is deemed to be systemically significant – a “threat” to the financial system. The powers extend to companies and, ultimately, financial products. The new regulatory body is to be both omniscient and omnipotent – supposedly able to predict future market excesses and use sweeping powers to stop them. If the bill becomes law, two outcomes are likely: the systemic risk regulator will prove as incapable of predicting the future as everyone else in history, and the regulator will prove so overly cautious that it prevents financial market innovation and stifles economic growth.