I’m surprised I only stumbled on this article today, but Gary Becker had a great piece several weeks ago on future financial regulations. Here’s an excerpt:
The claim that the crisis was due to an insufficient level of regulation is not convincing. For example, commercial banks have been more regulated than most other financial institutions, yet commercial banks performed no better than other classes of financial institutions. At the other extreme, hedge funds have been the least regulated, and on the whole they did better than most others in the financial sector. One major problem with regulations is the regulators themselves. They get caught up in the same bubble mentality as private investors and consumers. For this and other reasons, they fail to use the regulatory authority available to them. This implies that as much as possible, new regulations should more or less operate automatically rather than requiring discretionary decisions by regulators.
Becker goes on to say that future regulations could include tighter restrictions on asset-capital ratios, which could include progressive restrictions (higher asset-capital ratios as the financial firm gets bigger). This last part would discourage extremely large financial institutions from emerging, since size would inhibit financial versatility, thus solving the “too big to fail” problem in some respects.
I think Becker would also agree with the points that I made in previous posts about how regulation needs to be about better enforcement of property rights (i.e., not allowing credit rating agencies to falsely rate bundled securities as highly rated financial packages).
