As a result of the current financial climate, politicians, experts, and everyday citizens have been clamoring for an overhaul of the nation’s economic regulatory system.
Harvey J. Goldschmid, Columbia Law School’s Dwight Professor of Law and a former general counsel of the Securities and Exchange Commission, is one such expert calling for change. He advocates the creation of a systemic risk agency, separate from existing regulatory bodies, that will have far-reaching authority in the financial sector.
“We need one centralized regulator that can pull together information on what’s going on [in the economy] and then have the power to do things about it,” he said in a recent interview at the Law School.
To illustrate his point, Goldschmid cited the disastrous effects of credit default swaps. The frequency and irresponsibility with which many of these swaps were issued degraded their original purpose and forced banks to suffer dramatic losses, Goldschmid said. If someone had noticed, that could have mitigated the problem.
The ideal composition of such a systemic risk agency is very complicated, Goldschmid added. Although some talk about instilling such authority in the Federal Reserve, he is not certain that is the best idea. “Giving them this new systemic risk authority puts too much responsibility in one place,” Goldschmid said. “I think a new kind of council or institution, perhaps growing out of something called the President’s Financial Working Group, would be the answer to the ‘who’ issue.” The financial working group is comprised of the Treasury secretary, as well as the chairmen of the Federal Reserve, the SEC, and the Commodities Futures Trading Commission.
In addition to a core group of key financial players, a systemic risk agency would also need the capacity to contain troublesome situations, Goldschmid said. “Some ability to wind things up at a stage where the financial institution is in trouble but not yet gone, not yet in bankruptcy, would be very helpful, and Tim Geithner, the secretary of the Treasury, has pointed in that direction.”