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Professor Portes attacked the current proposals for financial regulation in Europe, and in the US as ineffectual - with the possible exception of the "living will" concept . Politicians are picking the easy targets - those they believe will appease public opinion.
He analysed different initiatives on financial regulation that have been proposed and pointed out where the mistakes lie. He made the following points:
· Tax havens had nothing to do with the crisis, nor with preventing or mitigating future crises, but they were an easy, convenient target. And they are disappearing. That is good, but we might wonder why they were not shut down earlier, since the major countries always had the instruments of pressure that they are finally using.
· Big bonuses. The quick return of big bonuses is offensive, as was the overall widening of income differentials that we saw in the two decades preceding the crisis. But anyone who criticised greed should not be surprised that there is no shame, while calls for new, higher standards of behaviour are unrealistic. Bonuses may have encouraged ‘short-termism’. But caps will be evaded, one way or another, as the big financial firms compete for stars who, they believe, contribute much more to profits than whatever bonuses they need to offer them.
· The draft Alternative Investment Funds Directive proposed by the European Commission without external consultations and embraced by indignant parliamentarians and some heads of government is another misplaced, irrelevant effort. There is no evidence that hedge funds or private equity had any role in causing the crisis, although hedge fund de-leveraging has been a part of the process through which the financial crisis has hit both asset prices and the real economy.
· Credit Rating Agencies. The European Commission and Parliament rushed to regulate the credit rating agencies, and now the US Congress may take similar measures. But this is precisely the wrong way to go. Rather than registration, surveillance and monitoring their models, which will have no effect whatsoever, the right policy would be to remove the agencies from the regulatory system. That is: eliminate the ‘regulatory licence’ which gives the ratings a direct role in limiting investment choices by asset managers and banks.
· The banking sector was already overly concentrated before the crisis. It is now more so, and there will be many more failures of small and medium-size banks, with resulting further ‘consolidation’. The remaining big banks have even more power. Far from being humbled by their egregious errors, they are vigorously, and successfully, opposing reforms that might reduce their profitability or their capacity to ‘innovate’, for which read ‘generate new kinds of overly complex, opaque, highly profitable financial instruments and activities.’
In his article, Portes mentioned that the only potentially effective policy instrument here is the excellent ‘living will’ proposal that big banks be required to propose detailed, pre-packaged resolution procedures that would apply when regulators judged that the bank had gone beyond the stage where prompt corrective action could save it.
He concluded by saying that “the perception that we have avoided catastrophe has already weakened the momentum for serious reforms, and the obstacles are formidable. We know the lessons of the crisis but may be unable to apply them. That would be a huge missed opportunity.”