Will The Merkely-Levin Amendment Work?


Regulatory discretion has, mostly for good reasons, fallen into something of a bad air. But sometimes discretion is necessary because it’s difficult to operationalize certain concepts into legislative language. Paul Volcker, for example, has called for banning “proprietary trading” by investment banks, but this requires a definition of what proprietary trading is. One approach would be for congress to simply direct regulators to allow market-making trades (this is part of the essence of what investment banks do) but prevent proprietary trading. Instead of doing that, the Merkley-Levin amendment seeks to create a precise set of rules spelling out exactly what can and can’t be done.

The problem with this approach is that in attempting to tie the regulators’ hands, you can actually wind up creating tons of loopholes in which banks are able to comply with the letter of the law while violating its spirit. Economics of Contempt mounts a spirited argument that this is essentially what’s happened with Merkley-Levin and that it would be better to rely on regulatory discretion. On the other hand, as best I can tell the financial institutions’ lobbyists are really trying to kill Merkley-Levin, which makes it hard for me to believe it’s as easy to evade as I’ve seen claimed. That said, sometimes lobbyists do bilk their clients by pretending legislative measures are more frightening than they really are.