Financial regulation and Wall Street?s meltdown

By: Gunther Karger
Posted: 03/12/2009

Outdated regulations  significantly contributed to the financial meltdown. They consist of loosely connected regulations overseen by different government and industry regulatory bodies. The Securities and Exchange Commission (SEC) deals with securities(stocks, mutual funds, equities, options) while the Commodity Futures Trading Authority(CFTA)  oversees futures, commodities and indexes both being government agencies with the president appointing the respective chairmen and commissioners. Adding to these are the industry self regulating agencies such as Financial Industry Regulation Authority (FINRA) overseeing the licensing and oversight of brokers, mutual fund salesmen, financial advisers  plus the several exchanges such as New York Stock Exchange and NASDAQ. We have the Federal Reserve Bank overseeing the banks which provide the funding for all this.

            The sum of all these and the bodies they regulate is “Wall Street” where it all comes together and now, all has fallen apart. There of course are underlying causes for our current crisis such as sub prime lending, wild Wall Street schemes and the downright frauds led by the $50 billion Madoff Ponzi criminal fraud. Lest we not forget the massive multi billion Dollar tax evasion schemes led by European banks helping U.S. corporations avoid paying Billions in income taxes and this does defraud all of us because it adds to the federal deficit.

            How could we have come to this point? The absence of effective regulations allowed this situation to evolve undetected and grow into the monster it has become. Our present crisis results from a massive failure of an outdated system which should have been restructured years ago.

Just as the world has gravitated and accelerated toward globalization in commerce and international relations, so has its financial structure. Technology continues to drive globalization. Leif Ericsson improved the Viking ship enabling him to discover America in the year 1001. Five hundred years later,  Ferdinand Magellan used celestial navigation to start trading with the Far East followed by yet another 500 years later when high speed telecommunications is today bringing the entire globe together in near instant commerce. Today, we must adapt regulations for a world which has already seen the integration of diverse financial structures. Had this been started ten years ago, we likely today would see a normal cyclical economic slowdown instead of a massive financial meltdown the worst seen since the Great Depression.  

            Today, the value of securities drive balance sheet valuations which enable corporations to borrow and banks to lend. Instant telecommunications and information systems have removed distance and time  into a seamless financial operating system. Most importantly,  paper currency has been replaced by instant credit transferred via modern technology. Our access to the financial system is as near as our computer and pocket carried Blackberry regardless of where we are. The present  and fragmented  financial regulatory system no longer is relevant to  the way our financial system works  and has gone out of control.

More than anything, it is the inability to react to rapid changes and maintain a problem reaction system instead of an early warning/detection/preemptive system that led us to where we are today. We are putting a band aid on a bleeding economy wherein problems are cascading more rapidly than the "cures" being implemented all leading to the spiral we find ourselves in. The lack of relevant and effective regulations is a key factor contributing to our crisis.

            While we need to take bold action, we must look at this problem as an opportunity for us to adjust to the next level in globalization relative to function, geography and cultures.

            I cannot overstate the need to address the systemic nature of our current regulatory problem. We must take the systems approach to restructure our regulatory system.  We have been totally unprepared and now must change our ways

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