House Republicans Aim To Reduce Regulation Of Derivatives

Via my colleague Pat Garofalo comes a story about why we’re certain to see a giant new financial catastrophe in the not-too-distant future:

The CFTC’s budget would fall to $172 million from $202 million under the plan to be considered tomorrow by the agriculture subcommittee of the House Appropriations Committee. It “provides the necessary resources” for the CFTC to fulfill its duties, Representative Jack Kingston, a Georgia Republican and subcommittee chairman, said in a statement. President Barack Obama had requested $308 million in his 2012 budget proposal.

The CFTC is the Commodity Futures Trading Commission. It regulates derivatives. And the issue here isn’t that derivatives are evil or that a 15% cut will or won’t necessarily devastate the agency. The issue here is just that regulating the global financial system is a difficult task. Intelligent people disagree about the best way to do it. And for any given regulatory scheme, large incentives will exist for bankers to find and exploit loopholes in it. So effective implementation will be different. If everyone was well-meaning and well-intended, regulation still might fail. And these are not the kind of budget measures that a political movement interested in getting the job done would be taking. Given the objective difficulty of making financial regulation work properly, there’s simply no chance that it will be effective if politicians don’t want it to work.

That, I think, has always been the core difficulty with evaluating the likely impact of the Dodd-Frank bill or anything else. What you need is a system where if a regulator sees something he thinks is regulatory arbitrage, that some kind of action is taken. Which means his bosses need to want action to be taken, and the members of congress who underwrite his budget need to want action to be taken.