Question

Suppose the U.S. government decided to abolish the Securities and Exchange Commission and Office of the Comptroller of the Currency. How would it affect the investment and growth in the economy?

Answer 1

In order to answer this question, it is important to understand the role that these two critical organizations play.

The Securities and Exchange Commission is an independent agency of the US government that is primarily responsible for enforcement of federal security laws and the broad regulation of the securities industry (including the stock exchange). The key role of the SEC therefore is to protect investors and maintain fair & efficient markets.

The Office of the Comptroller of the Currency is another independent organization within the US department of treasury and its key role involves the regulation and supervision of national banks, enforce anti-money laundering laws, anti-terrorism finance laws among others. Overall, it ensures safety and soundness of the banking system.

Coming to the key question, if these organization were to be abolished, investment and growth in the economy would falter.

The first reason is that if the SEC was abolished, the capital market functioning would be severely impacted. Investors would not have ample information and disclosure about companies and there can be potential manipulation in capital markets. The result would be that companies would find it difficult to raise capital for growth. This would impact overall economic growth. Further, abolishing of the SEC can potentially lead to manipulation in markets and stocks might not trade at fair value. Therefore, the overall attractiveness of capital markets would decline and this would impact growth funding options as well as investor wealth creation (which boosts consumption spending).

It is also important to note that the banking system is the backbone of the economy. During the financial crisis of 2008-09, this point was evident and the economy went into a free fall as the banking system was severely impacted. Therefore, if the Office of the Comptroller of the Currency was abolished, the trust in the banking system would decline significantly. There would be no organization to ensure that the banking system health is sound and safe. Importantly, credit growth can be potentially impacted if there is loss of trust in the banking system. This will impact leveraged investment and consumption spending in the economy.

Therefore, both organizations are critical in terms of oversight and provides investors and consumers with the confidence to trust the capital market and the banking system. If these organizations were missing, economic growth is likely to be severely impacted and investment in the economy coupled with consumption spending is likely to be hit hard.