Two Visions on Financial Reform
posted by Lawrence Cunningham
We may have more ideas than money, judging by the proliferation of proposals for financial system reform amid continuing declines in our personal and societal net worths. At least five notable formulations for financial reform are in circulation. Others are forthcoming, including two that I’m working on (one a law review article with David Zaring and another a Washington-based policy formulation project).
Perhaps the most prominent and detailed proposals yet are two that may be seen as arch-competitors: one created by former Bush Treasury Secretary Hank Paulson and another led by former Fed Chair and Obama advisor Paul Volcker.
In addition, the Committee on Capital Markets Regulation (Harvard law professor, Hal Scott) offers
proposals that tend to resemble many of those Paulson endorsed. The Center for Capital Markets Competiveness (Chamber of Commerce) lays out some broad goals and policy preferences and the Government Accountability Office contributes general statements of principle that should guide reform design.
An emerging consensus seems to accept, among the broadest change, expanding and consolidating all regulatory power over all important US financial institutions in its federal government. Most also endorse tighter regulation of rating agencies and extending regulation to all financial products and markets, including derivatives like credit default swaps.
But important differences exist, revealed forcibly in comparing the Paulson and Volcker analyses and visions. First, Paulson would put this newly-consolidated federal authority under the control of the President (along with the Treasury Department and Federal Reserve) whereas Volcker appears to prefer vesting it in an independent agency subject to Congressional oversight.
Second, Paulson sees much of this newly-consolidated federal authority assuming a light touch, primarily focused on generating information, and delegating much authority to self-regulatory organizations in the various industries; Volcker proposes very strict substantive regulations formulated by independent federal authorities, including limits on trading activity and the size of financial institutions.
Third, Paulson’s consolidation and delegation model seems intended for the purpose of promoting US capital market competitiveness with other nations whereas Volcker’s consolidation and control model wishes to develop international coordination among comparably strong regulators elsewhere to impose order on the global financial system.
There are thus hints in these competing proposals of what Thomas Sowell has contrasted as “constrained” and “unconstrained” world visions: Paulson shows a constrained world vision reliant on spontaneous coordination in markets a la Adam Smith versus Volcker showing an unconstrained world vision needing expert-driven coordination a la John Maynard Keynes. [Hat tip and reading suggestion here to Todd Henderson, Two Visions of Corporate Law, Geo. Wash. L. Rev. (forthcoming 2009).]
January 23, 2009 at 4:38 pm
Posted in: Current Events
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Mike Guttentag - January 27, 2009 at 4:31 pm
I needed to use a slightly different URL to get the GAO report: http://www.gao.gov/new.items/d09314t.pdf
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