January 14, 2010

Government Regulation vs. Financial Innovation

Mary Schapiro, chairwoman of the SEC, admits before a US Financial Crisis Panel that the [SEC] cannot keep up with the "cleverness" or innovation of the financial industry in terms of regulation.

This is huge – which means that the savviness of the large banking institutions is way ahead of regulation.  This has led us to the financial demise we are currently in today – and this is why laws and taxes are now being suggested for the larger institutions to protect the American economy.  And possibly prevent any future bailouts for these institutions that take extreme risks – and cause a seismic economic meltdown in the process.

Most mutual funds (such as your 401K) can only invest in AAA rated securities/bonds, as required by the SEC, that are supposed to give you a good return in our portfolio so that we may have a “decent” retirement.  However, to get around this requirement and be able to reap the profits from investing in riskier securities, mutual funds would loan money to other funds such as hedge funds – which have no SEC requirement in the type of securities they invest in.

What moves should the SEC, FDIC, FBI, FINRA, and any other regulatory agency implement to prevent or at least mitigate the risks involved between banking institutions and investors (you and me), without harming the innovativeness of the American economy?