November 20, 2008 - 11:42am
With an increased Democratic majority in Congress and a Democratic president set to be sworn in Jan. 20, policy analysts expect the government will try to steer out of the pending financial crisis through regulation.
However, William Poole, former chief executive of the Federal Reserve Bank of St. Louis and a former voting member of the Federal Open Market Committee, said increased regulation would be a mistake.
“Many observers want more regulation to ensure the financial crisis cannot recur,” Poole said at the Cato Institute’s 26th Annual Monetary Conference Nov. 19. “As I read the plea for more regulation, I see no specifics for what regulations would accomplish that task. I fear that Congress will pass sweeping new regulatory authority with financial stability objectives – that is, fancy preambles in the legislation – but no clear idea of how to accomplish the objectives. Regulatory agencies will be directed to solve the problem.”
Poole used the payday loan industry as an example of the consequences more regulations would have. Markets like payday loans would be driven “underground,” where they are unregulated and pose a bigger risk to individuals.
“Regulatory agencies will probably try to ban certain financial instruments thought to be dangerous,” Poole said. “Consider payday loans as an example. An attempt to ban such loans will simply drive the market underground. An attempt to ban certain sorts of mortgages could lead to the same result, or if effective such bans will stifle innovation.”
One of the main causes of the global financial crisis is thought by many to be the excesses of subprime lending. Poole said subprime mortgages served a useful purpose, but they were pushed to “excess.”
“The subprime mortgage was a useful innovation, introduced by largely unregulated mortgage companies and not by federally regulated depository institutions. The problem was that subprime mortgages were pushed to excess. If such innovations are made impossible, subprime borrowers will not have future access to credit, except through costly federally subsidized programs.”
Poole also warned this regulation would be crafted to suit political purposes and would make the economy uncompetitive because it would drive financial firms away out of the jurisdiction of the federal government.