Washington, D.C. (5/27/2009) -- John L. Thornton, Chairman of the Brookings Institution and co-chairman of the Committee on Capital Markets Regulation (CCMR), stated that the CCMR’s recommendations for the Obama administration, are not part of a fix-all plan.
“We are under no illusion that this is the only answer,” said Thornton. “We are trying to make a substantial contribution to the discussion.”
In a press conference Tuesday at the National Press Club in Washington D.C., the CCMR, a non-partisan, independent research center released a new comprehensive report titled, “The Global Crisis: A Plan for Regulatory Reform.”
The report, physically resembling a one inch bound book, contains 57 recommendations, summed up by the committee members in four critical objectives. These objectives include: Reducing systematic risk through regulation; increasing investor protection and market stabilization through further disclosure; defining accountability lines and transparency for consumers by creating a unified regulatory system; viewing these regulations on a global level and implementing an effective system of international financial oversight.
“Our work is based entirely on empirical data,” said Thornton, recommending a need for Federal intervention on market regulation, especially when it pertains to anything directly affecting systemic risk.
This recommendation hits a particularly tender spot in American politics, at a time when U.S. policy making is leaning towards increased federal power with the democratic majority in the Senate. Under the Obama administration, the republican representation in on Capitol Hill is suspicious of further governmental power, especially in financial regulation.
But the CCMR committee members argued that increasing federal power would only level the playing field and ensure that all financial institutions were operating under the same regulations. And there was no one in the room willing to play the devil’s advocate.
“That’s the problem with present economy; there is too much ill-defined responsibility,” said Hal S. Scott, Nomura Professor and Director of International Financial Systems at Harvard Law School. Scott offered federal regulation as the answer to overarching accountability to avoid “continued problems of the past.”
Committee members noted that a past push for a financial council is no longer the most advantageous route of action. Scott said that when a council in involved there are too many people working together with too many differing opinions.
(The committee witnessed this in the development of their own plan, as they attempted to collaborate amongst their 25 members to reach a consensus to produce the final document of recommendations discussed at the press conference.)
Scott noted that a council can be an affective form of regulation when it is monitoring function of financial institutions. In this situation, there is a great need for collaboration between entities. However, when it comes to dealing with these institutions on an operational level, Scott believes that someone has to take responsibility. And for Scott, and much of the CCMR committee, that someone is the Feds.
One main item on the agenda for the CCMR is their recommendation for the listing and trading of certain standardized high-volume Credit Default Swaps (CDS’s) during exchanges. This would provide the government with greater transparency and liquidity of CDS markets, as well as a greater assurance to the American people of a presiding system of “checks and balances.”
The CCMR committee believes that within the CDS regulation reform, there needs to be a privacy clause: keeping the activity of hedge funds private, while at the same time, opening its dealings up for criticism and reprimand, should the federal government notice suspicious behavior that could be potentially compromising to the U.S. economy.
“Our plan dove-tails very well with Obama’s call for greater transparency,” said Glenn Hubbard, the Dean of Columbia Business School and co-chairman of the committee. Hubbard said that the committee has presented the Obama administration with the plan and it is keeping them updated on its development.
Hubbard added that he is optimistic that policy makers will embrace the bold reform, saying that when it comes to regulation, the Obama administration is using the word “encourage,” where the committee is using the word “require.” The words are a few degrees different in severity, but on the same page.
As far as the average American citizen goes, the CCMR’s recommendations may not appear to have any great immediate influence on day to day life. That being said, the committee hopes that the plan will increase economic stability, which would decrease the likelihood of future regulatory failure. It would highlight greater counter party positions, making them more apparent for the average citizen.
“There would suddenly be much morel light out there,” said Roel Campos, the partner in charge of Cooley Godward Kronish’s Washington, D.C. office and the fourth member of the panel representing the CCMR. He referred to the effects of the plan as creating a “new dawn” in the American economy. Making the argument that consumer and investor psychology is a more important factor in economic stability than it appears in the process of policy making.
When people have more confidence in the economy in both the present and the future, they are more willing to invest. This may seem like a no-brainer, but it is vital to economic stability and will inevitably be an important factor in any plan for regulation reformation.
The CCMR continued to push its endorsement of government intervention in economic regulation, concluding with the idea that it is necessary for the federal government to be involved with increased regional regulation dialogue between the United States and other countries.
Scott said, “Since these are international agencies, regulations should exist at the highest level…the federal government should have the last say.”
By Catherine Moore, camoore@bu.edu
