Reuters Editor Thinks Financial Regulation 'Still a Very Feudal' System
"It is still a very feudal, very Byzantine regulatory system," Freeland complained on the PBS News Hour with Jim Lehrer, referring to the Senate's approval of a financial regulations bill yesterday.
A radical policy, Freeland maintained, could have done away with the current "fractured" group of regulators and established a much stronger, more unified single regulator.
However, Freeland said the bill succeeds in tempering the rapid movement of capital. She did acknowledge that Main Street folks will have more trouble getting mortgages than they did in the past. "That's the price of having a safer financial system," she said.
Freeland's championing of the new regulations does not diminish some other aspects of the bill, which include no additional regulation of Fannie Mae and Freddie Mac, tougher times ahead for small businesses trying to procure loans from banks, and tough times for small banks themselves, who lack the resources of Wall Street to deal with the new regulations.
Freeland and fellow guest, Roben Farzad, senior writer for Bloomberg Businessweek, both used the metaphor of traffic safety for the new financial regulations passed yesterday by the Senate.
"What we have discovered in hindsight is that capital was moving too fast," Freeland preached. "The speed limits were too high, and there weren't enough air bags, and there weren't enough seat belts in the system." The goal of the new regulation, Freeland added, is to "require all of us to wear seat belts."
"I think the legislation succeeds in doing that, maybe not 100 percent, but to some extent," she concluded.
Farzad used Freeland's metaphor as a spring board for his next talking point. "Oftentimes, time and again, Wall Street has shown that it doesn't want to drive 65. A lot of this money is going to go offshore."
The transcript of the segment, which aired on July 16 at 7:31 p.m. EDT, is as follows:
JEFFREY BROWN: Of course, Chrystia, some of the bankers involved here, they -- they argue that the new regulations could impact mortgages, they could curtail lending. What do we know about what will happen?
CHRYSTIA FREELAND: Well, if they work, then they should curtail lending.
JEFFREY BROWN: That's part of the issue, right?
CHRYSTIA FREELAND: Part -- yeah, yeah, that's part of the issue.
And I do think that people, you know, the American public has to be honest about this. Part of the purpose of this financial regulation is, if you want to use a traffic metaphor, what we have discovered in hindsight is that capital was moving too fast. The speed limits were too high, and there weren't enough air bags, and there weren't enough seat belts in the system.
The goal, broadly speaking, of this legislation is to lower the speed limit of financial capital and to require all of us to wear seat belts. Now, the good news is, I think the legislation succeeds in doing that, maybe not 100 percent, but to some extent. And that should mean that car crashes, you know, 100-car crashes are a little bit less likely in the future.
But what it also means is that capital is going to move a little more slowly. That is the inevitable cost. And for Main Street, that means, yes, it will be harder to get a mortgage than it was in the go-go years of 2006-2007.
Inevitably, we are going to be writing stories – you are going to be do reports about poor American homeowners who are no longer able to get a mortgage. Well, guess what? That's the price of having a safer financial system.
JEFFREY BROWN: Now, Roben...
ROBEN FARZAD: And may I chip-shot off...
JEFFREY BROWN: Yes, go ahead.
ROBEN FARZAD: ... off Chrystia's point, actually? I mean, you want to talk about speed limits here. Oftentimes, time and again, Wall Street has shown that it doesn't want to drive 65. A lot of this money is going to go offshore. It's going to reconstitute in other esoteric vehicles, much the same way we saw private equity and leveraged buyout boom after Sarbanes-Oxley, the last huge show of re-regulation that we had in the early part of last decade.
I think it's very important to notice that. And this money, I mean, there's still lots of restive capital out there that is going to look for yield. I don't think the securitization market is going to die. These people – like I've said before – Wall Street gets paid a lot to learn how to game the system. If it has to move money abroad, so be it. If it has to use special purpose entities, so be it. And that's the prediction that a lot of people are making today.
JEFFREY BROWN: Well, so, Chrystia, in terms of who watches going forward, to make sure that those kind of things don't happen or untoward things don't happen, what does the bill bring in terms of regulatory changes? The Fed still has – actually, the Fed maintains a lot of power. And Roben referred to that new council, the oversight council.
CHRYSTIA FREELAND: Yes, exactly. I mean, that is a new thing. And it is really important that there now is a council that has overall authority. I think the issues there are, first of all, it's still a very feudal, a very Byzantine, regulatory system. If you were being radical, you could have really shaken up this very, you know, fractured, very multi-group group of regulators and said "We want to have more unity. We want to have a single regulator. We want to make it easier to oversee the system and harder for these banks to engage in regulatory arbitrage."
So, it is a tough job for the regulator. And the second really important point, which your report highlighted, is so much of this is going to be about the judgment of the regulators. And I think, when we look back at the financial crisis of 2008, one of the conclusions we're going to draw is, regulators forgot that their job was to be policemen. And they started to see themselves as farmers, if you were, of Wall Street.
They started to think that their job was to help financial services to grow. Now, that might be the job of other parts of government, but, surely, the job of regulators is to make sure these guys are not doing things which are too risky.
And what will really determine whether we have another big financial crisis in the next five years or 10 years is going to be what attitude the regulators take.