Bob Jane T-Mart
Smash Ace
Barrack Obama has just passed a bill regarding the regulation of the financial sector. I feel he may need a little support on this issue, so I'm going to argue that regulation is a good thing.
Definitions:
Deregulation: the removal or simplification of government rules and regulations that constrain the operation of market forces. Source
Financial Sector: Banks, Investment Banks, Hedge Funds, etc.
Shadow Financial System: Non-bank financial institutions that play an increasingly critical role in lending businesses the money necessary to operate. This includes hedge funds and investment banks.Source
Liquidity: The ability to exchange ones assets for cash. The more liquid it is, the easier it is to exchange for cash. The freezing of an asset means that it can’t be exchanged for cash.
I am arguing that excessive deregulation of the financial system is done at the expense of society. I am going to do this by explaining the role of deregulation in the current global financial crisis and showing that in the absence of regulation, the corporations can't be trusted to regulate themselves.
Deregulation of the financial sector is possibly one of the principle causes of the current Global Financial Crisis. The growth of shadow financial system was rapid in the lead up to the crisis. They seem to be a fairly recent phenomenon; many of them are less than a decade old. The reason these new firms have grown rapidly was that they were running very high risk, high return operations. They relied heavily on borrowing money to keep afloat, and didn't keep much capital in reserve. However, when times were good, their profits were very high. These firms invested in various things. This included the housing market (indirectly) and corporations. The shadow financial system had become extremely important in providing credit throughout the financial system, even surpassing the more conventional banks in terms the total asset worth. In fact, the then President and CEO of the New York Reserve Bank said this:
Now, I’m sure we all know that the GFC was a bad thing, so I’m going to assume it’s a given.
Now the reason this was all possible was the Commodity Futures Modernization Act of 2000. This basically exempted the shadow financial system from normal regulation. The investment banks didn’t have to keep the same amounts of capital in reserve as retail banks, nor did their trading even have to be supervised. These corporations were basically set free to run riot.
This is wrong for two reasons, because it contributed to significant amounts of economic harm ie. a global recession, and it’s just thoroughly unfair. Why should retail banks have to obey more stringent restrictions than investment banks, when they both have similar importance to the economy as a whole?
Now at this point in time, you may say that the banks can regulate themselves. To that I say, rubbish. These corporations are required to serve their shareholders to make a profit. That is the only reason they exist. This leads to taking greater risk in the name of profit. Since the passing of the Commodity Futures Modernization Act a few investment banks Merrill Lynch, Bear Sterns, Goldman Sachs, Morgan Stanley and Lehman Brothers, all the ones that failed (or got bailed out), progressively took more risk. They took out more much debt, so they could invest much more.
The other thing is, the bankers don’t want regulation. They don’t want to have to keep a decent supply of capital in reserve in case things go pear shaped, they don’t want to have their trading supervised either. The President of the American Banking Association, in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (designed to regulate the financial system and protect consumers) says that:
These are the reasons why regulation is necessary, and why excessive deregulation, such as the Commodity Futures Modernization Act, is a detriment to society. It contributes and causes significant economic harm and the corporations cannot be trusted to regulate themselves, so deregulation poses the risk that such a crisis will occur again.
Sources:
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5332752.ece
http://en.wikipedia.org/wiki/Late_2000s_recession
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis
http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
http://en.wikipedia.org/wiki/Dodd-Frank_Wall_Street_Reform_and_Consumer_Protection_Act
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/09/AR2009110901935.html?hpid=topnews
Financial Deregulation: A Detriment to Society
Definitions:
Deregulation: the removal or simplification of government rules and regulations that constrain the operation of market forces. Source
Financial Sector: Banks, Investment Banks, Hedge Funds, etc.
Shadow Financial System: Non-bank financial institutions that play an increasingly critical role in lending businesses the money necessary to operate. This includes hedge funds and investment banks.Source
Liquidity: The ability to exchange ones assets for cash. The more liquid it is, the easier it is to exchange for cash. The freezing of an asset means that it can’t be exchanged for cash.
I am arguing that excessive deregulation of the financial system is done at the expense of society. I am going to do this by explaining the role of deregulation in the current global financial crisis and showing that in the absence of regulation, the corporations can't be trusted to regulate themselves.
Deregulation of the financial sector is possibly one of the principle causes of the current Global Financial Crisis. The growth of shadow financial system was rapid in the lead up to the crisis. They seem to be a fairly recent phenomenon; many of them are less than a decade old. The reason these new firms have grown rapidly was that they were running very high risk, high return operations. They relied heavily on borrowing money to keep afloat, and didn't keep much capital in reserve. However, when times were good, their profits were very high. These firms invested in various things. This included the housing market (indirectly) and corporations. The shadow financial system had become extremely important in providing credit throughout the financial system, even surpassing the more conventional banks in terms the total asset worth. In fact, the then President and CEO of the New York Reserve Bank said this:
Unfortunately, the shadow financial system didn’t have the regulation of the conventional banks. And when the housing market fell, many of them lost money. The lack of liquid assets on hand meant that claims for the money they owed couldn’t be payed. This is exactly what happened to Lehman Brothers and Bear Sterns. And it just so happens that the collapse of Lehman Brothers was the final straw in starting the Global Financial Crisis. There was an already weakened financial market, and then the Lehman Brothers blew the whole thing into oblivion, affecting much more than just banks.Timothy Geithner said:
Now, I’m sure we all know that the GFC was a bad thing, so I’m going to assume it’s a given.
Now the reason this was all possible was the Commodity Futures Modernization Act of 2000. This basically exempted the shadow financial system from normal regulation. The investment banks didn’t have to keep the same amounts of capital in reserve as retail banks, nor did their trading even have to be supervised. These corporations were basically set free to run riot.
This is wrong for two reasons, because it contributed to significant amounts of economic harm ie. a global recession, and it’s just thoroughly unfair. Why should retail banks have to obey more stringent restrictions than investment banks, when they both have similar importance to the economy as a whole?
Now at this point in time, you may say that the banks can regulate themselves. To that I say, rubbish. These corporations are required to serve their shareholders to make a profit. That is the only reason they exist. This leads to taking greater risk in the name of profit. Since the passing of the Commodity Futures Modernization Act a few investment banks Merrill Lynch, Bear Sterns, Goldman Sachs, Morgan Stanley and Lehman Brothers, all the ones that failed (or got bailed out), progressively took more risk. They took out more much debt, so they could invest much more.
The other thing is, the bankers don’t want regulation. They don’t want to have to keep a decent supply of capital in reserve in case things go pear shaped, they don’t want to have their trading supervised either. The President of the American Banking Association, in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (designed to regulate the financial system and protect consumers) says that:
This man here is representing the banks that will be regulated. They don’t want to be regulated, because that would mean they’d have to follow rules, keep capital in reserve so they don’t fail, not rip-off consumers, and generally behave like good citizens. This means that the banks don’t wish to be regulated for the good of society, and therefore cannot be trusted to regulate themselves.Ed Yingling said:
These are the reasons why regulation is necessary, and why excessive deregulation, such as the Commodity Futures Modernization Act, is a detriment to society. It contributes and causes significant economic harm and the corporations cannot be trusted to regulate themselves, so deregulation poses the risk that such a crisis will occur again.
Sources:
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5332752.ece
http://en.wikipedia.org/wiki/Late_2000s_recession
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis
http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
http://en.wikipedia.org/wiki/Dodd-Frank_Wall_Street_Reform_and_Consumer_Protection_Act
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/09/AR2009110901935.html?hpid=topnews
