Bad Prospects For the U.S.'s New Financial Regulation Plan

Since the beginning of the financial crisis, people have been getting a deeper understanding of its causes. An important marker of this trend is the daily proliferation of “catch the bad guy” movements. Amidst the clamor of discourse, several targets of criticism frequently appear, including the U.S. financial regulation authority.

As the financial regulation body is politically independent, both Democrat and Republican politicians are free to express their feelings about its ineffectiveness. Many people hold fast to such a conclusion: If regulation was stronger, more timely, more focused, more…then the crisis could’ve been avoided. In response to such people know what to do in hindsight, I would say this: There is no such thing as better or worse regulation; it only takes one crisis to negate the regulating body’s reputation.

Following days of deliberation, the Obama government has finally brought forth a new plan for reforming financial market regulation. The contents of this plan quite nearly satisfy the previous demands of the market. Among the details include not just strengthening the regulation of financial stock-control organizations and increasing oversight of derivative markets, but also creating a new organization to protect mortgage credit and finance consumers, giving the government power to control large-scale financial companies of systematic importance, creating a policy to coordinate regulation with that of other countries, and more.

In short, the actions of the president of “change” are nothing short of restoring the long dead idea of “big government” back into the market. At the same time, former President Bill Clinton’s famous statement “the era of big government is over” has been thoroughly discarded by the new Democrat Obama.

It must be pointed out that no one is counting on Obama’s new plans alone to cleanly solve the crisis, which has already injured the international economic financial system. But this major surgical operation on the financial regulation system has worried many. With this kind of mentality, can a formidable American-style big government really avoid future problems?

The answer is no.

According to George Soros, “The U.S. needs to return the regulation environment of the fifties and sixties.” That era’s advantage was a moderate business cycle that never approached crisis. But post Bretton Woods, telling the fairy-tale of a “golden era of U.S. currency” is comparable to getting a worldly-wise middle-aged man to believe in the “happily-ever-after” scenarios of soap operas.

Why? The times and situation are different.

First, company conglomerates in and of themselves bear an increased financial system risk. The system’s weaknesses have increased, and the individual organization’s risks cannot be completely flushed away by a simple increase of capital or an increased degree of regulation. Second, the innovation of the derivative is that it circumvents regulation to acquire profit, meaning that expanding regulation can’t prevent this crisis from occurring. Third, consumers who made greedy mistakes may be over-protected, perhaps inducing them to feel like they got away with what they did, and the market’s sacred rules are more easily blasphemed. Fourth, it is inevitable that the government, given control of large-scale financial institutions, will become alienated from the market, not just diluting the rights and interests of original stockholders, but also having to face the problem of returning government bonds. Finally, even if the regulations of global organizations become mutually accommodating, there is still the lack of encouragement towards such an arrangement. Examples of ineffective rules are something we are all familiar with.

Today, the deeper problem in the international economic financial world is how the circulation of the U.S. dollar, which is tied to the U.S.’s huge debt, will develop. This is just about the most important variable restricting the future direction of the world’s economy. Even if starting from today, U.S. consumption, investment, and trade (all (controlled by big government) can unfailingly go up, the problem of the accumulation of a U.S. dollar surplus foreign nations (which will create a bubble) will still arise. The fear of a self-bursting bubble every three to five years cannot eliminate the world’s habitual fear that a U.S. currency lacking a material base cannot circulate forever.

The aforementioned fears cannot be calmed by the regulating body’s cold rhetoric. Not to mention that more regulation doesn’t equate to better regulation. To be more precise, a good economy does not require regulation.

(The author is a researcher for the China Cinda Asset Management Corporation.)