Transcripts

"Commentary"-Tips For The Next President

SUSIE GHARIB: With the presidential election just weeks away, we continue our series of special commentaries, looking at the candidate's economic choices. Every Monday and Tuesday leading up to the election, we will have commentaries dealing with the candidate's platforms and positions. Tonight, Jack Coffee, professor at Columbia University's law school, has some thoughts on what the next president needs to do about financial regulation.

JACK COFFEE, LAW PROFESSOR, COLUMBIA UNIVERSITY: The first economic priority of the next president must be to avoid the need for future bailouts by toughening regulation. This requires him to appoint regulators who will end the current rush to deregulation, and who will restrict excessive leverage by financial institutions. Regulatory failure played a major role in the collapse of our leading investment banks. In 2004, the SEC quietly relaxed the rules that restricted the degree of leverage that an investment bank was permitted to use. Banks quickly responded by increasing their leverage, and when the market soured, they were left exposed and vulnerable. In retrospect, the SEC's mistake now seems symptomatic of that era: rapid financial deregulation gave free rein to underlying speculative tendencies of Wall Street firms, which are motivated by annual bonuses and stock options to focus more on the short run. What should be done? The first step was outlined this April in a Treasury Department report that proposed major regulatory structural revisions. As it correctly observed, the U.S. has the most fragmented system of financial regulation of any major nation. Prudent reform requires that one centralized regulatory body monitor the safety and soundness of any financial institution whose collapse could destabilize our economy. Our next president must recognize that bailouts will be needed again unless we toughen regulation today, particularly of those institutions that claim they are "too big to fail." I'm Jack Coffee.