Peter S. Goodman: Make Money by Avoiding Rules
[Peter S. Goodman has been a national economic writer for the business section of The New York Times since October 2007.]
From the earliest days of capitalism, those skilled at making money have proven creative at evading the regulators.
In the Middle Ages, when usury laws banned lenders from charging interest, savvy merchants lent in one currency and took repayment in another, thereby profiting without incurring the wrath of the Catholic Church. So much has happened over the ensuing centuries — a blur of financial ingenuity spanning the creation of stocks to the mortgage-backed investments of the present day — yet history remains unbroken: Time and again, financial innovation finds a lucrative path around regulation.
As Congress and the Obama administration now enter the endgame in an effort to temper the dangers that delivered the worst financial crisis since the Depression, experts assume that this historical narrative will hold. If anything, swift advances in technology — computerized trading strategies unleashed on a global landscape — have made it harder for watchdogs to simply recognize the risks building within markets, let alone deliver effective action....
Not that regulatory efforts are futile. The history of finance is full of crises that spawn regulatory steps, snuffing out trouble before a new variant pops up. The wildcat banking era of the 19th century, when banks in multiple states issued their own (sometimes worthless) currency, spurred the creation of a national bank supervisor. When opportunists and charlatans sold stocks to the public without disclosing the extent of their debts, culminating in the stock market crash of 1929, the federal government created the Securities and Exchange Commission.
The New Deal reforms imbued traditional banking with a sense of safety, but also encouraged financiers to seek out greater profits by taking risks in areas beyond regulatory purview. The resulting shadow banking system that emerged over the last quarter-century — the murky world of unregulated corporate insurance contracts and other flavors of so-called derivatives — nurtured the recklessness that ultimately metastasized into today’s global crisis. The government had effectively tamed the traditional banking business. Wall Street expanded to more adventurous terrain, erecting frontier-style casinos beyond the edges of regulation....
Read entire article at NYT
From the earliest days of capitalism, those skilled at making money have proven creative at evading the regulators.
In the Middle Ages, when usury laws banned lenders from charging interest, savvy merchants lent in one currency and took repayment in another, thereby profiting without incurring the wrath of the Catholic Church. So much has happened over the ensuing centuries — a blur of financial ingenuity spanning the creation of stocks to the mortgage-backed investments of the present day — yet history remains unbroken: Time and again, financial innovation finds a lucrative path around regulation.
As Congress and the Obama administration now enter the endgame in an effort to temper the dangers that delivered the worst financial crisis since the Depression, experts assume that this historical narrative will hold. If anything, swift advances in technology — computerized trading strategies unleashed on a global landscape — have made it harder for watchdogs to simply recognize the risks building within markets, let alone deliver effective action....
Not that regulatory efforts are futile. The history of finance is full of crises that spawn regulatory steps, snuffing out trouble before a new variant pops up. The wildcat banking era of the 19th century, when banks in multiple states issued their own (sometimes worthless) currency, spurred the creation of a national bank supervisor. When opportunists and charlatans sold stocks to the public without disclosing the extent of their debts, culminating in the stock market crash of 1929, the federal government created the Securities and Exchange Commission.
The New Deal reforms imbued traditional banking with a sense of safety, but also encouraged financiers to seek out greater profits by taking risks in areas beyond regulatory purview. The resulting shadow banking system that emerged over the last quarter-century — the murky world of unregulated corporate insurance contracts and other flavors of so-called derivatives — nurtured the recklessness that ultimately metastasized into today’s global crisis. The government had effectively tamed the traditional banking business. Wall Street expanded to more adventurous terrain, erecting frontier-style casinos beyond the edges of regulation....