Paulson's Deregulation Mania

With the Bailout bill now in the statute books, perhaps it's time to reflect on the deregulatory mania that got us here. As recently as March of this year the Treasury put out a Blueprint for a Modernized Financial Regulatory Structure.

The proposal provides a history of the development of financial regulation in the US and outlines short, intermediate and long term "solutions" to the problems identified.

Professor Lawrence Cunningham described the proposal this way:

In the new approach, Congress preempts all state laws and consolidates all power in a senior regulator in Washington. That regulator, in turn, delegates all its functions to self-regulatory organizations from the respective supervised industries. These, in turn, adopt their own regulations, self-certify them for speedy adoption, with limited public notice or comment, and use broad vague statements rather than detailed rules.

This approach, the philosophical heart of the US Treasury Department’s March 2008 blueprint for changing US financial regulation, is procedurally revolutionary and would no doubt revolutionize the substance of the law in these fields.

As a matter of procedure, no longer would the SEC develop or negotiate regulations governing securities markets. The stock exchanges and broker-dealers do so themselves. Nor will the CFTC assure that futures markets operate in an orderly fashion, letting the private National Futures Association do it alone. State banking and insurance regulators are out, a new federal supervisor is in for both, and banks and insurers form private associations to self-regulate. Public supervision, now solely federal, consists mostly of receiving information from participants and, when needed for systemic stability, publicizing this information to market participants so that markets can self-correct.

Substantively, numerous changes should be expected in such a regime. Take examples from the securities context. Restrictions against insider trading would be relaxed considerably or eliminated.|The Coming Regulatory Revolution - Concurring Opinions|

It is difficult to predict the eventual fallout of the current financial fiasco, but we can only hope it will discredit radical proposals like this that would essentially allow financial institutions to self-regulate.