Financial Regulation for Dummies

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I consider myself of a former finance dummy.  I studied social sciences in college and worked in non-profit.  I had no clue about how financial markets worked until I enrolled in business school and started taking courses in the unknown, mostly out of curiosity.  After two years of coursework, I now feel like I have at least a proper foundation to start thinking about how the world of finance should be regulated.

But the scary reality is that most of the people charged with writing the financial regulation bill never bothered to take the class.  When Senator Levin went on his public tirade against Goldman Sachs, it was clear that he didn’t understand the difference between trading and making markets.  Yet the public and Congress are clearly moved by these theatrics – shortly after the Senate hearing, the financial regulation bill began moving forward, all of a sudden buoyed by that ever-elusive relic, bipartisanship.

Regulating finance is enormously difficult because it’s never about individual actors.  Sure, there is the occasional Bernie Madoff and Fabulous Fab Tourre, but they don’t bring down entire markets.  These are serious collective action issues, which makes them all the more difficult to regulate.  Imagine if the government tried to regulate trending topics on Twitter.  Though I would welcome it, I really doubt they could find a way to stop those damn Justin Bieber tweets.

I worry, because no regulation founded on fundamental misunderstandings can ever be effective.  So I will attempt to do my part, with a brief series to explain what I think are the most important elements of financial reform: derivatives, the ratings agency, the resolution trust authority, and the consumer financial protection agency.  As someone with no ties to Wall Street, I only hope to demystify these things in a way that both recognizes the risks involved as well as some of their benefits.

so stick around.  derivatives are up first…

Posted on May 13th 2010 in news

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