In the past, regulation of financial markets was typically a matter of private industry and state governments working together. However, this is no longer the case with the global financial crisis. New regulations are being put in place by both the private and public sectors in an attempt to prevent another economic meltdown. But how do we know whether these new regulations are effective?
1. The Problem of Regulatory Capture
Since their inception, one problem that has plagued regulators is regulatory capture; it’s simply not possible for government or private entities to regulate themselves effectively because corporations have significant investments at stake. Corporations pay large sums of money to influence legislation to continue making profits. Without the threat of fines, they have little incentive to follow strict regulations. Thus, it becomes almost impossible for any laws to be passed to protect citizens from corporate abuse without some oversight.
2. The European Union
The European Commission is trying to solve many of the problems facing governments when regulating markets by using the following models: (i) the separation of commercial interests and democratic decision-making, and (ii) requiring full disclosure of potential conflicts. These policies aim to create more transparency between political bodies and business entities.
3. Securities Market Reform
The U.S. Congress created the SEC to ensure investor protection after the stock market crash of 1929. In addition to increasing investor protection, the SEC aims to minimize risk through increased disclosure requirements on companies. Another initiative is Dodd-Frank; one of five pieces of primary legislation intended to reform the financial sector after the 2008 collapse.
4. Federal Reserve System
The Fed was established at the start of the Great Depression to stabilize the economy through monetary policy. Unlike other central banks worldwide, the U.S. dollar is still backed by gold reserves. While this provides stability, it also means that the United States cannot adjust its money supply easily like other nations. Other efforts include using macroprudential tools such as interest rates to combat housing bubbles.
5. Bank Bailouts
Several countries used bailouts to save big banks from failure during the recent recession. Though this stabilized the system, it caused controversy among opponents because it violated the principles of free-market democracy.
6. Volcker Rule
Another controversial measure that has been proposed is the Volcker Rule which limits what banks can invest in. Opponents argue this is unconstitutional, while proponents suggest reducing risks. There is speculation that Wall Street may lobby against this rule because they expect less investment income over time.
Dil Bole Oberoi
