What do we have to do, be hit on the head with a brick before we regulate financial markets? Well, actually, we already did get hit on the head with a brick—or the economic equivalent thereof—the worst recession since the Great Depression due in large part to the negligent supervision of our financial markets by regulators during the George W. Bush administration. And yet, there’s serious talk about nipping new regulatory enforcement in the bud by starving the implementing agencies of funds. How many bricks is this going to take?
For all its failings, Congress doesn’t like getting hit in the head by economic bricks. So, voila! In 2010 Congress went through a very painful process of passing financial market regulatory reform. The representatives of Wall Street, however, did their best to make the regulation as weak as possible. The resulting legislation isn’t perfect—arguably, it didn’t go far enough or put authority in all the right places—but there is no serious question that it’s way better than the brick-inviting system that existed before.
One feature of financial reform is that some agencies will have a great deal more to do than before as they monitor a hugely complicated financial system to keep it stable and strong. This is a major challenge. Unlike, say, the auto industry, where there are only a handful of companies over which to monitor compliance with safety standards, financial markets and financial companies are innumerable, complex, and quite skilled at hiding things that they shouldn’t be doing. If a car company stops putting seat belts in cars, everyone notices. If a hedge fund creates a new form of exotic derivative that amounts to a “financial weapon of mass destruction,” it’s hard to know unless someone is keeping a very sharp lookout.
More work supervising the financial system means we need more financial cops on the beat, which costs money. That’s why when reform legislation was passed in July 2010 it was understood that, among other measures, the Securities and Exchange Commission, the Commodity Futures Trading Commission (which is assigned the duty of regulating derivatives trading) and other regulatory agencies, new and old, would need to spend more—a sound financial investment we all benefit from through greater stability.
Now, however, with the change in power in the House of Representatives, that spending is in doubt. Unable, and maybe unwilling, to openly undo financial reform legislation, the conservative strategy is to deny regulators the funds to do their job. Chamber of Commerce President Tom Donohue called on lawmakers to “starve to death financially” financial regulatory reforms. And we’re hearing such brilliant remarks as the one by Rep. Scott Garrett (R-NJ) that increasing funding “would further the mindset that our nation’s problems can be solved with more spending, not more efficiency.” With all due respect, have these gentlemen been paying attention?
Think regulation is inefficient and costly? The International Monetary Fund estimates that the financial crisis has cost U.S. taxpayers, after subtracting fees and penalties paid by financial institutions, 3.6 percent of GDP—which adds up to hundreds of billions of dollars. On top of that is the cost of the gut-wrenching pain this crisis has caused for most Americans through lost wealth, high unemployment, and stagnating incomes. That’s not to mention the scores of other countries similarly afflicted. Add those up to see the true cost of not regulating finance. Talk about “million wise, trillion foolish.”
It’s also worth noting that this isn’t all about falling-brick-avoidance, it’s also about building a strong economic foundation. With a well-regulated financial system, investors will be more likely to spend their capital in uses that will create jobs and allow new businesses to grow and innovate.
One idea being floated by the head of the Commodity Futures Trading Commission as a result of the possible funding shortfall is that the CFTC could impose a small tax on the transactions over which they have authority in order to pay for its expanded duties. He paints this as a last resort, but it makes perfect sense. The Securities and Exchange Commission has long relied on fees and a very small tax on stock trades, 0.00192 percent, to fund its operations. And it’s putting the cost of doing business exactly where it belongs—on those who benefit from the business.
One can debate the overall merits of a financial transactions tax, but some variant is absolutely appropriate for funding the regulation that we definitely need. And that’s an idea that hardly requires a brick to the head to appreciate its merits.
Michael Ettlinger is vice president for economic policy at the Center for American Progress. Adam S. Hersh is an economist at the Center. To read more about our economic policy positions go to the Economy page on our website.
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Vice President, Economic Policy