The Dodd Frank financial reform bill was 2319 pages long, filled with myriad new thou shalts and shalt nots. Sarbanes Oxley was a mere 66 pages. Imagine what damage is to come from the lobbyist bloated Dodd Frank. Regulation is a game always won by the regulated and their lobbyists. Every extra page of Dodd Frank is an opportunity for some clever lawyer to weaken the intended regulation in some way that benefits his clients. And if he’s really clever it will hamstring a competitor at the same time. That’s why complicated regulatory schemes never work. The regulated industry always ends up writing their own rules. It’s called regulatory capture just in case anyone in Congress wants to check Wikipedia.
Regulation done right is done simply. There is no need for 2319 pages of financial regulatory reform. The reform could have been accomplished simply and permanently on one page. I don’t think I can say it better than this editorial from Bloomberg:
If Europe’s leaders find the political will for another bailout, they should make sure it’s the last, if only because the dire state of government finances makes it doubtful they can afford any more. Simple, hard-to-circumvent capital rules should be the primary condition of any taxpayer-financed solution to Europe’s financial troubles, and there’s no good reason the required level should be any lower than 20 percent. The only losers would be leverage-obsessed bankers, who might have to go cold turkey and earn a living by finding productive uses for their shareholders’ money. That’s a price society can afford to pay.
The idea that we can regulate the behavior of banks in a way that reduces risk while maintaining their profit margins is absurd on its face. If you want to reduce the risks associated with banking, they will have to make less money. Period. End of story. The simplest way to accomplish that is to raise the capital requirements high enough to reduce leverage to a reasonable level. 20% would be a good starting point.