Question

1. Read the attached WSJ article “Where Financial Regulation Goes in a Republican Era.” Use 250-300 words to summarize the opposing views of the proponents and opponents of the Dodd-Frank Act on free market, regulation and the role of government.  Make sure you incorporate their views on the cause of the subprime loan crisis, Volcker rule and predatory lending. Briefly explain which point of view (proponents or opponents of the Dodd-Frank Act) is more appealing to you.

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THE WALL STREET JOURNAL

Where Financial Regulation Goes in a Republican Era

A closer look at the two main competing visions—and what they mean for consumers, institutions and the economy

ByRyan Tracy And Andrew Ackerman

April 24, 2017 10:12 p.m. ET               

The 2008 financial crisis was a global economic catastrophe that triggered years of new regulations designed to prevent another meltdown. Now that tide of rules is cresting, with officials across the globe talking about pulling back regulations instead of adding new ones. The defenders of the current regime are fighting to save it.

At the heart of the debate are opposing philosophies about free markets, regulation and the role of government. After 2008, the Obama administration in the U.S. pursued an aggressive rule-making path, injecting the government further into bank boardrooms, loan-underwriting decisions and conversations about retirement advice—all in the name of protecting citizens from a financial crisis and risky financial products.

With Republicans in control of the White House and Congress, the U.S. is seeing a resurgence of a different philosophy, one that favors freer markets and is skeptical of Washington’s recent approach to overseeing Wall Street. The government, these critics say, has repeatedly overreached in trying to prevent another crisis. It should take stock of all the work that has been done since the crisis—and consider rolling back many rules that critics say aren’t working as intended or weren’t needed in the first place.

As the debate rages on, here’s a closer look at the two competing visions for financial regulation.

Rein In the Banks: The Need for Discipline

Advocates who support active financial oversight favor an approach that can be summed up this way: Let the markets work, but within significant regulatory constraints to protect society from excesses.

Left to their own devices, financiers can cause a lot of trouble, advocates say. Big banks have incentives to seek short-term profits without regard for the long-term consequences of their actions—and the 2008 crisis provided an example of just how much damage they can do if they succumb to those incentives.

Financial firms and consumers lent or borrowed too much, and regulators failed to act on warning signs before this excessive risk-taking spiraled out of control. Worst of all, the government bailed out some firms because it determined they were “too big to fail” without the financial system imploding. The result was a panic so sweeping, it dried up credit for Main Street and threatened the entire economy.

Regulatory hawks concede that government housing policies may have played some role in inflating the housing bubble but say it wasn’t central to the meltdown. Lack of oversight was. So, they argue, the government has an obligation to protect the economy from risky behavior—by banning those behaviors entirely or adopting policies that act like a tax on it, making it less attractive in the short term. Financial firms and their customers may have less freedom under these rules, but these advocates say that the effects of those restrictions pale in comparison to the cost of a huge financial crisis.

The 2010 Dodd-Frank law, approved by a Democratic Congress and signed by Democratic President Barack Obama, expanded the government’s power to react to what it viewed as emerging risks in financial markets. Firms considered “systemically important” to the economy now face tougher rules and more intrusive oversight than smaller competitors. A new regulatory

The idea is that if these firms pose an outsize risk, they should pay for it through higher regulation, even if those rules are complex. Federal Reserve Chairwoman Janet Yellen has said huge banks must “bear the costs that their failure would impose on others.” If the firms don’t like the regulation, so be it, these policy makers say: They can shrink or split themselves apart.

Tougher rules have meant that regulators take a far more active role in the continuing management of large firms, and to some extent smaller ones as well. The pro-regulation advocates acknowledge that such involvement might be uncomfortable, but say it’s a lot better than burdening taxpayers in the event of future bailouts.

Take the case of dividends. Large banks can no longer decide on their own to raise the dividend they pay to shareholders. They must get permission from the Federal Reserve first as part of their annual stress tests. The Fed justified the restrictions by pointing out that in the lead-up to the 2008 crisis, big banks paid out capital via dividends, then months later needed capital from taxpayers to stay alive. These restrictions are just one example of the myriad extra rules firms must now keep in mind as they make day-to-day business decisions.

In another case, when financial firms started ramping up a practice bank examiners considered dangerous—“leveraged loans” to companies already deep in debt—regulators at the Fed and the Office of the Comptroller of the Currency responded with prescriptive lending standards that they relentlessly enforced. Critics say the regulators should have let firms make their own lending decisions, but the Fed and Office of the Comptroller say that when a type of lending poses a risk to the broader economy, they have an obligation to try to nip it in the bud.

Explaining the Debate Over Financial Regulation

Backers of an expanded regulatory regime also believe the government has an important role in setting standards for the sale of financial products to limit fraud and deception. Lenders must document a borrower’s ability to repay a mortgage loan, for instance. Under another Obama-era rule, financial advisers must take their clients’ best interest into account when giving advice about investing for retirement.

Supporters of this approach acknowledge that it will restrict financial firms from doing certain kinds of transactions, but say it still leaves them plenty of room to operative and innovate. They just won’t be able to operate quite so freely as to do considerable potential harm to their customers and the public. They also say more needs to be done to improve financial oversight, such as addressing the continued purgatory of Fannie Mae and Freddie Mac, the mortgage firms that are still under government control, and looking for ways to ease the burden of enhanced regulation on community banks.

Those who support a hard line on regulation agree with critics that regulators won’t be able to stop every crisis. But they believe disasters would be more likely if regulators didn’t act strongly when they see budding risks.

“Wall Street Reform isn’t perfect,” former Treasury Secretary Jacob Lew wrote in an academic journal in December. But he added: “It would be a grave mistake if technical refinements were to give way to a dismantling of the new forward-looking, flexible approach to regulating the financial sector that Wall Street Reform established.”

Let the Market Work: Complex Regulations Do More Harm Than Good

Proponents of freer financial markets say the government should let the banks and markets function with limited constraints from bureaucrats. In their view, post-financial-crisis regulations have harmed the broader economy through expensive and unduly restrictive red tape.

Government interference in any industry or market produces unintended consequences, because bureaucrats and regulators don’t have the knowledge that people working in the field do, regulatory critics say. That leads to problems and distortions when the government tries to push an industry to do something to achieve a political goal that’s unrealistic.

The housing bubble was a particularly disastrous example of this kind of meddling, the critics believe. They argue that the government pushed a goal of boosting homeownership through policies that essentially forced banks to take on risky borrowers. Fannie Mae and Freddie Mac lowered their standards, further signaling that lenders should take on low-quality borrowers.

Regulatory critics think the way to head off severe crises is to have fewer rules, not more. Have the government set simple guidelines about what financial firms are allowed to do, and then let the markets decide the rest. Executives will have a natural incentive not to go overboard because they won’t have the government to back them up if they make mistakes—and if they do things that may harm consumers, they will lose business.

Ultimately, this side argues, the market does a better job of rewarding good ideas and behavior—and punishing bad—than the government ever could. Regulators, meanwhile, aren’t infallible, and could just as easily miss a future crisis as they missed the last one, deregulation boosters say.

So they strongly favor easing postcrisis financial regulations, including the 2010 Dodd-Frank financial law, which they say will end a period they see as unduly restrictive.

For instance, the so-called Volcker rule bans banks from most trading or speculating unless they are doing so on customers’ behalf. Proponents say the rule is designed to rein in reckless risk-taking at taxpayer-insured banks, but conservative critics complain that it is unduly burdensome to comply with, and deprives banks of legitimate moneymaking opportunities. They also say it has harmed liquidity—the ability to easily buy or sell—in certain financial markets.

Critics have also argued against the postcrisis rules for trading financial instruments known as swaps. In the lead-up to the crisis, these vehicles acted as a form of insurance against defaults on all sorts of debts. Dodd-Frank supporters in Congress argued that the market for swaps was kept opaque, and mandated that banks report swaps, among a series of sweeping changes. But Republican critics say regulators needlessly limited the methods by which banks are allowed to execute such trades. The limited flexibility has sent trading of these instruments overseas and away from U.S. markets, these critics say, fragmenting markets in potentially harmful ways.

A plan on the table—from Rep. Jeb Hensarling (R., Texas), who heads the powerful House Financial Services Committee—would reverse course on Dodd-Frank. It would scrap most of the law’s provisions and exempt big financial institutions from many rules as long as they maintain higher capital levels, measured in a simple calculation. Mr. Hensarling says this approach would curb excessive risk-taking by banks, because they would fund loans with a larger share of investor equity instead of riskier forms of funding. And that, in turn, would mean banks wouldn’t have to rely on the government to assess and head off financial risks, returning the management of financial firms to their executives.

“This approach not only helps unleash greater opportunities for small businesses, innovators and job creators, it also stops investors from betting with taxpayer money,” Mr. Hensarling said in a speech last fall.

Some policy makers, who maintain regulators are too slow to embrace innovations, see other benefits from lightened rules. Chris Giancarlo, the top U.S. derivatives regulator, has been especially vocal about the need for Washington to fully embrace financial-technology firms. His concern is that rules created for an analog world haven’t kept pace with—and may stifle—digital innovation. For instance, financial-services firms should be encouraged to experiment with new digital strategies rather than be constrained by numerous rules. Proponents of stricter rules also say those rules should accommodate innovation.

Advocates for loosened regulations also say fewer rules would benefit borrowers. For one thing, they argue, postcrisis Washington has forced banks to be overly conservative in their lending decisions, which hurts consumers. For instance, in the name of protecting borrowers from bad practices by so-called predatory lenders, people with less-than-pristine credit histories have trouble obtaining home loans from banks.

Along similar lines, advocates want to curb the powers of the Consumer Financial Protection Bureau, an agency created under Dodd-Frank to police consumer-finance markets. The bureau’s defenders say the mortgage crisis showed U.S. consumers needed a new financial cop. But critics say restraining the bureau would lead to more lending and availability of credit.

Yet another priority: a repeal of stricter standards for brokers who provide retirement advice. The rules, they say, are overly complex and will reduce access to advice for investors with lower-balance accounts.

The investment-advice rule unduly restricts options for retirement savers, Gary Cohn, a top economic adviser to President Donald Trump, said in a February interview. It “is like putting only healthy food on the menu,” he said, “because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”

Answer 1

Case Specifics:-

Read the attached WSJ article “Where Financial Regulation Goes in a Republican Era.” Use 250-300 words to summarize the opposing views of the proponents and opponents of the Dodd-Frank Act on free market, regulation and the role of government.  Make sure you incorporate their views on the cause of the subprime loan crisis, Volcker rule and predatory lending.

It is an undeniable fact, that the United States is the country which sets the growth pattern for rest of the world, because of the fact that it is a nation which is viewed as one of the best across the globe in terms of overall productivity and also has a large market share in the overall global economy respectively.

The 2008 Financial Melt Down which resulted from the housing crisis and saw the Wall Street rapidly tumbling and the economy ending up in a big depression which required active support from the government to bail out, was a result of careless spending by public sector banks since they did not closely monitor the loans which were granted out and the credit worthiness of the people before granting loans since their focus was on short term goals which is also referred to as predatory lending.

This resulted in higher restrictions being placed by the government, most recently through the use of Dodd-Frank Act which makes it possible for governments to directly control businesses and impose restrictions on business owners on the basis of perceived threats to the economy of the nation. The main aim is to take corrective action before the occurrence of an assumed problem. The government during the Obama administration advocated for higher government interventions which have not gone well with the supporters of free trade in the United States respectively.

The Volcker Rule are additional laws, which prevent banks from certain investments that the government may consider risky for business. As such banks are prohibited from doing speculative business directly from their own accounts. The main aim again being financial control.

Section B Opinion:-

In my personal opinion, the role of the government cannot be such, that it regulates the interests of private players in an economy. The United States is well known for its freedom granted to people within the constitution with regards to the activities they can conduct and the banking sector, companies and financial institutions are no different.

Companies should not be controlled in terms of the investments they make, and banks cannot be directed on what investments they can make subject to certain basic credit rating laws. The role of the government should indeed in the matter be restricted.

It is important to know, that management of private companies and how they choose to invest should not be restricted by law to allow them to freely explore and grow in areas of their individual choice respectively.

Free trade allows greater freedom to producers to produce goods and maximize their revenue, and people enjoy higher freedom in terms of what they want to do with the money.

To protect the basic instincts of economics and concepts such as demand and supply and market based economies, therefore it is advisable that countries adopt policies in which the role of the government is limited to general controls and cannot extend beyond to areas such as management of enterprises or taking investment decisions for them respectively.

Please feel free to ask your doubts in the comments section.