As Congress prepares to move forward on financial services regulation, it’s worth taking a step back to look at the proposals for what they really are: behavioral control mechanisms. This is not to say that regulation is inherently bad. A free market can only exist within a framework of rules for competition. And there are certainly some good aspects of the White House plan to reform Wall Street’s rules. But the core measures the president wants passed before the end of the year are simply the expansion of government to dictate terms of action to financial institutions and consumers.
First, the Consumer Financial Protection Agency (CFPA) is an attempt to control the behavior of financial institutions, and what they can or cannot offer. It is an attempt to govern the behavior of individuals who are apparently no longer capable of bearing responsibility for their own actions in choosing financial products. Wright and Zywicki write for FinReg21 that there is a “high likelihood of unintended consequences that will result from [CFPA] actions, including reducing competition and valuable consumer choice.”

Second, derivative regulation reform proposals would make it very expensive and complicated to write unique derivative contracts between firms, with rules designed to push the market towards using more standardized products. Why? Because standard contracts are easier to monitor, easier to control.
Third, the tiered structure for regulating financial institutions will create categories that allow the government to vary its regulatory rules based on the arbitrary perception of risk in the market by the regulators. Washington is looking to control how much risk firms can take, and what kinds of risks.
And fourth, the executive pay rules that passed the House and are now before the Senate Banking Committee, grant the government authority to restrict compensation packages it deems “threatening” to the financial sector. Not only is a grab at more control, this power would allow regulators to intimidate companies into setting pay by its terms without ever having to exercise the power.
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