Most people still aren't all that up on the many variations on the "highly inventive" market for securities and derivatives -- including 99.9% of the people in the finance industry. However, the majority have gotten the message that this expansive and ill-understood family of fiscal instruments was a big part of the hammer that pounded our economy into the ground over the last 18 months.
With that in mind, you'll be relieved to hear that regulations have now done... well, nothing, really. The same much-vaunted inventiveness that generated securitized rafts of swaps acting as side-bets on bundles of mortgage-backed derivatives is all still in place. There's exactly no new regulation to keep people from issuing more of the junk that weighed down the financial system with enough theoretical bills to pave a highway to Saturn (really, do the math). While we've been sticking trillions of fingers into the dike, we've been trusting the same guys who poked the original holes to play nice while we were fixing up the place.
So it's good to hear Timothy Geithner and Lawrence Summers talking about finally taking some steps to address the root problems rather than the results.
The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.
That sounds good, but you know what would sound a lot better? Put back the walls that existed previous to Gramm-Leach-Bliley filling Wall Street with too-big-to-live monsters of merged fiscal functions. But the idea of removing the ability of financial firms to co-mingle their resources and purposes, arguably the biggest factor in the meltdown, doesn't appear on the list of issues to be addressed.
Rather than break up the bank-broker-insurance mergers, the administration proposes to chase them by merging regulatory functions.
The plan also calls for harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of "over the counter" derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.
If that merger represents a genuine simplification of the current tapestry of contending regulation and elimination of all the various bits of embroidery and brocade that allow all kind of shenanigans to grow, then good on it. It's not nearly as appropriate as forcing the various financial functions to return to their respective corners, but at least it's something. To this point, the recovery has been managed with 99% carrot, 1% stick.
As this unification of financial regulation gets underway, we'll have to see if it represents a real merger, with elimination of overlapping functions, or whether it becomes the kind of pointless exercise as the supposed merger of the intelligence communities.