Friday, January 22, 2010

Too Big to Fail

The Obama administration is acting to do something about the too big too fail phenomenon, which I flagged as a possible policy direction. I'm not enthusiastic though about the anti hedge fund/proprietary trading moves that are accompanying this. Luckily none of the crazier ideas in Jackson's book are included. I'd favor limits on risk budgets rather than just banning institutions from certain activities. The key thing is to make sure the regulation is adaptable to new financial instruments. For example, limits on margin loan leverage has been totally bypassed by all the other methods of increasing leverage that are available.

But, the NYT says:

"Both changes require legislation by Congress, and Republican leaders, as well as the banking industry, signaled on Thursday that they would resist the proposals."

And that is going to be an issue now. So don't expect too much of this is going to go anywhere. Though it's hard to think that the Republicans could block all regulatory action in response to this crisis and remain electorally viable? You never know.

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