Friend Nelson emailed me asking for my opinion on Obama’s recent regulations to limit bankers’ speculation in financial markets.
Actually I don't think President Obama can actually achieve that. Over the past century, countless such regulations intending to limit the activities of the banking sectors were passed by the Senate but none were effective enough to achieve their initial goals (and many have been abandoned since). The problem is that bankers are notorious for innovative ways to combat such regulations - they work about the law and invent new kinds of derivatives or forms of products to bypass the limitations of law. With these reactions, the regulation on the financial industry can at best change bankers' behavior in the very short run - this is merely an inefficiency to the economy which cannot change the future of the banking industry.
Similarly, last week, I heard that the Obama administration is proposing to limit the size of financial agencies, in order to avoid the "too big to fail" problem. I bet it won't work either. You can control the size of each company, but you cannot control who owns these companies. Bankers can easily work around and split one company into several with intimate ties that link them to each other financially.
Basically I have not yet seen any such regulations that truly work, and if one does not work, it becomes mere inefficiency. Some propose the government should deregulate bankers and restrain from bail-outs to teach bankers to be independent in the long run and be responsible for their own behaviors. But this solution is also problematic. After all I still do not know a suitable solution to the asymmetric information concerns in the financial sector. Maybe this is a theme I can work on in the future.
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