Wednesday, June 17, 2009

Tyler Cowen seems to be concerned that the CFPA will limit the flow of financial innovation

From Free Exchange:

"Keeping financial products safe
Posted by: | WASHINGTON

THE administration's new regulatory plan also seeks to clean up some of the toxicity that developed in the area of structured finance. For starters, the bill would have originators of asset-backed securities keep 5% of the credit risk of their securitised exposures on their own balance sheets. Federal authorities can also dictate which slice of a security gets retained (for instance, no just holding on to the super senior tranche) and for how long it must be kept on a balance sheet.

There are some passages about improving ABS transparency, and improving reporting of conflicts of interest among ratings companies. Perhaps more importantly, the draft suggests that regulators ought to reduce their use of credit ratings when they can.

OTC derivatives, including credit default swaps, get some attention. They are to be brought within the regulatory fold, and will be cleared through regulated central counterparties. And then we have the creation of the much discussed Consumer Financial Protection Agency. The CFPA is designed in part to give consumers an independent voice in the regulatory process. It will also be intended to protect consumers from various kinds of abuse and to provide them with information about any financial product widely marketed to consumers.

Sounds lovely, but it remains to be seen how widely and vigorously such an organisation would use its authority in practice. Tyler Cowen seems to be concerned that the CFPA will limit the flow of financial innovation. I suppose I'm inclined to believe that its efforts to protect consumers will be overriden more often than not by those looking to safeguard "innovation", in its benign and malignant forms.

Much remains to be seen at this point."


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Don the libertarian Democrat wrote:

June 17, 2009 21:24

Any domain that is backed by government guarantees should limit innovation.

Any domain that allows significant innovation should not have government guarantees.

We should have a system that does not allow for problems in the non-guaranteed system to infect the government guaranteed system

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