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System Dynamics in Financial Regulation

Another nail to the coffin

There is much hustle in Brussels as the EU market commissioner proposes steps to curb swap trading. The German chancellor presses for tighter EU regulations on hedge funds. In the UK, we are told, regulators seek tools to “burst dangerous asset bubbles before they are built”. Four banks, including JPMorgan Chase my employer, face trial over sale of derivative to Milan municipality, allegations that echo the role investment banks had in fueling Greek debt. It’s interesting that in the Greek and Italian stories the banks are cast as villains and public sector as a defenseless simpleton. But what is really amazing is that all these stories are reported in just one Financial Times edition. Things are moving at a dizzying pace. Financial policy is going through an overhaul.

Aiming at the wrong target

Meanwhile in the US, where the villains are the same but the simpletons are the homeowners, there is talk of a new regulatory body, the Consumer Financial Protection Agency. Though reckless mortgages are a real issue, it is not the most pressing one. Leverage and structured derivative products should be the main concern. While mortgages happened to be the raw material for structured products in the last crisis they may not be the building block of the next one. Creating a new agency is a more dazzling legislation than strengthening existing agencies (SEC, Federal Reserve) but is it a better policy?

Talking of new bureaus, Sloan professor Andrew Lo proposes to create a “financial industry crash safety board” that will investigate financial crises in the same manner as plane crashes. I am skeptic that will work or that it is necessary since there are numerous people probing into the last crisis anyway. But, I am proud to see that our professors publish such columns. Maybe that is why he is too busy to answer my email requesting to take part in his research group (-:

Sources

http://www.ft.com/cms/s/0/77069b0e-32bb-11df-a767-00144feabdc0.html

http://online.wsj.com/article/SB10001424052748704625004575090310653549910.html

http://www.ft.com/cms/s/0/011cbf2e-2599-11df-9bd3-00144feab49a.html?nclick_check=1

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