Deal or No Deal: The Arguments Against Any Meaningful Financial Reforms

The Deal.com has a story about the Nature of Financial Reform in view of the World Credit Crisis which basically argues that reform in the US is hopeless because a)the regulators become captured by the very financial markets they are supposed to control and b) competitiveness of US financial firms will be jeopardized by regulations that foreign firms do not have to adhere to. The following comment on the financial markets being far from perfect but outright dysfunctional was posted as a counter argument to doing next to nothing but maybe allowing for a few ritualistic Madoff-like sentencings. Here is that comment:

This raises two good issues for the “minimization of reforms” and if markets were properly self correcting then they would be appropos. But financial markets on the grandest scale are simply not working because they have been systematically disarmed:

1)Regulators have been captured and by guess who????

2)Financial Markets are far from perfect information and transparency as they become increasingly opaque by deliberate plan – think hedge funds, private equity, and the complex securitisation plus ill-tested/understood financial derivatives.

3)Note the number of huge and well healed financial firms that “cashed in” on their implicit “too big to fail” Moral Hazard Insurance policies. This is the classic “heads I win, tails you lose” policy that has been foisted on taxpayers increasingly more frequently in the past 30 years.

4)Fiduciary trust has been retired in the name of “own account”, gaming the system, and targeting for huge personal compensation pay packets. Financial professionals have no allegiance to a Hippocratic oath of “do no harm to the client”. Instead more and more financial transactions are viewed as being zero-sum => my win means you have to lose absolutely. Think naked short selling from September to December 2008.

5)Self regulation and control are minimized because a)there are too many free loaders and b)foreign competitors will put US firms at a competitive disadvantage.

So in the name of US Financial Competitiveness and “Regulators will be captured”,  dysfunctional financial markets must be tolerated .. nay embraced as the US contribution to the 21st century . Congratulations.