After years of passivity and inaction, the SEC launched a ban on naked short selling of selected financial stocks over a weekend. Compare this to the decades it sat by and let a handful of credit rating agencies enjoy oligopolistic profits as the sole official guardians of investment grading. Now the SEC chairman, Christopher Cox, tells Congress his agency, not the Fed, should have oversight responsibility for the investment banks.
What’s going on?

Reuters does a nice analysis and quotes a couple of regulatory experts saying Cox is under pressure from others in the agency to become more active – he was missing in action during the Bear Stearns meltdown.

A couple of years ago I heard an investment banker who used to work at the SEC say the agency was simply scared of the investment banks. The banks do, after all, have a lot of political clout and a lot of very bright, very highly paid people working for them. Compare that to the SEC.
Paul Krugman, the liberal economist and columnist for the New York Times, says something must be done to bring American financial regulation into the 21st century, although the politics and economic power of the financial sector gives him some doubts that intelligent change will occur.

“Basically, the financial framework created in the 1930s, which brought generations of relative stability, needs to be updated to 21st-century conditions.

“The desperate rescue efforts of the past year make expanded regulation even more urgent. If the government is going to stand behind financial institutions, those institutions had better be carefully regulated — because otherwise the game of heads I win, tails you lose will be played more furiously than ever, at taxpayers’ expense.

“Of course, proponents of expanded regulation, no matter how compelling their arguments, will have to contend with very well-financed opposition from the financial industry. And as Upton Sinclair pointed out, it’s hard to get a man to understand something when his salary — or, we might add, his campaign war chest — depends on his not understanding it.”

Filed under: Credit Crunch, Technology, regulation