Michael Bright lores
Michael Bright
Director, Center for Financial Markets
Housing Finance and Regulation
Michael Bright is a director at the Milken Institute’s Center for Financial Markets (CFM), where he leads the housing program. In addition to housing finance, Bright works on issues related to international and domestic financial market regulation and policy.
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5 Regulatory Reform Questions Worth Considering in the Wake of the Election

By: Michael Bright
November 21, 2016

Originally published by Yahoo! Finance

It will take some time for the dust to settle from Election Day 2016. But when it does, Washington needs to be ready to roll up its sleeves and get to work.

Elections offer a vital glimpse into the mindset of the American public. And last week one message seemed to clearly come through—Americans want economic growth to be faster and broader.

So how can Washington help make that happen? There are many facets to the challenge, but certainly the role of the financial services sector will be vital.

To that end, perhaps it’s time for “regulatory reform 2.0.” If we want to try, here are five questions worth considering:

1: Why are banks not lending to low-income individuals and small businesses?

This is the first question that offers us the opportunity to take off our ideological hats and seek some pragmatic answers. So let’s look at a few facts. The cost to service a mortgage has quintupled since the financial crisis. The shares of home loans originated to minority borrowers have declined considerably. Meanwhile, bank lending of small loans to businesses peaked at $72.5 billion in 2006 and has been on a rapid trajectory downward ever since.

We need to get banks back in the business of lending. Congress and the administration need to ask them what it will take to do this, and it needs to be a policy focus next year.

2: Should Congress take back from the Fed responsibility for full employment?

In 1978 when Congress passed the Humphrey-Hawkins Full Employment Act, it said the new law would put unemployment on the path to extinction. But it has not quite worked out this way.

Likely for good reason. While monetary policy of course does have an impact on employment, there is little marginal upside to having two mandates: low inflation and low unemployment—versus just one: low inflation. Most of the time a single inflation mandate would have no effect on monetary policy. After all, inflation is typically low when the unemployment rate is growing.

What a single mandate would do, however, is put the onus on Congress to craft fiscal policies that lead to employment growth. Monetary policy should just be one tool in the toolkit. A dual mandate gets Congress off the hook. Maybe this should change.

3: Did we really intend to push so much risk-taking outside the regulated banking sphere?

People in Washington love to hate Goldman Sachs (GS) and JPMorgan (JPM). And I mean really hate them.

But do people in DC have an opinion on high frequency trading firms like Jump Trading? Because they should. According to a recent report, Jump Trading represents nearly 30% of the daily transaction volume in U.S. Treasuries on BrokerTec. HFTs collectively are over three quarters of trading. This market intermediation used to happen inside regulated banks.

It’s not just trading. Marketplace lending, non-bank servicers … the list goes on. In our efforts to “eliminate” risk vis-à-vis the banks, we’ve pushed a lot of risk elsewhere. Washington should examine this dynamic. Risk is moving. Someone needs to understand where it’s going and why.

4: Does our regulatory architecture need a cultural overhaul?

Financial regulators are woefully underequipped to deal with a rapidly evolving market. There are many reasons for this, but a big one is the culture of our regulatory agencies.

Regulators need to be places where talented, public-policy-minded people who know their industry want to work. Oversight of an industry should be something smart technicians feel proud to do. But our regulatory system does not always attract this type of mindset. This is a shame.

There are a lot of people in the financial services industry who think finance needs to change. There are a lot of people who believe that financial services became too bloated and self-serving, and didn’t do enough to get capital into the real economy to serve growth. These individuals should be welcome in Washington.

There’s a big difference between someone using the revolving door to enrich himself versus someone using it to make the system better. The latter needs to be encouraged.

5: Are we really helping investors by creating a cottage industry of compliance?

In the wake of accounting scandals a decade ago, Washington focused heavily on creating new investor protections. And that’s fine enough—the functioning of the stock market relies on the public having accurate information. But, the pendulum may have swung too far.

Companies today devote as much time and resources to their quarterly earnings announcement as they do to developing growth strategies that actually impact those earnings. Ask anyone in leadership at a corporation how much time they spend planning for earnings, and I guarantee the answer will be “too much.”

Earnings numbers are important, yes. But over the long-term, wouldn’t investors be better suited if the focus on earnings at corporations was the challenge of growing them, not reporting them?

These are just a few places to start. But if we are going to embrace pro-growth regulatory policies next year, these are some of the right questions to ask.