The new financial regulations

 I could have written this blog before the financial regulations were finalized and published in the Wall Street Journal.  Now is a good time.

There is nothing, absolutely nothing that will change America's or the worlds exposure to financial risk with the enactment of this law. Nothing.  This law will cost $20 billion to implement and a few billion a year to administer.  It will do nothing... nothing positive.

The law is based on two fallacies. The first is that some kind of government agency has the ability to evaluate and avert serious financial risk.  Since we have never seen such an imaginary action there is no reason to expect it to happen in the future.  Countless financial people saw the dangers of FreddieMac and FannieMae and it meant nothing.  The Fed has vast powers and never uses them.

The new regs create four federal bodies to operate with oversight.  The debates within those oversight bodies will be heated, some people will be right, but more often these bodies will be seen to be ineffective or punitive long after the next financial fiasco.

Second, the new regs will put derivatives into a visible market.  That is good, but it ignores the fact that financiers will invent new and more obscure financial instruments that will be larger, more volatile and far outside the realm of regulation... in a very short time.  Just read what an interest rate swap is in wikipedia and you'll know that government will never keep up with the ingenuity of the financial market. 

I myself used to invent financial instruments (I invented and introduced the consumer certificate of deposit) and smart people will always be around to outsmart government regulators.

The same reasoning applies to all the new regulations in the consumer area.  New fees will spring up to replace regulated ones faster than grass after a Spring rain.

This whole government band-aid is a farce.  The only productive steps for the future will be to separate financial speculation from the solid, steady conservative commercial system.  Guarantee a large category of secure bank loans and lines of credit to business. The only intelligent action is to segregate finance from productive commerce.