Regulating Pendulums

How much regulation do the banks need?

The Dodd-Frank bill has been around for a year now, and it’s reasonable to ask if anything has changed. The logic behind Dodd-Frank is simple: our capitalist system runs on self-interest and profits. Regulation is necessary to make sure things stay within reasonable limits—things like systemic risk, concentration of power, and prevention of fraud. If professional ethics, self-regulation, and a sense of limits could be counted on, we wouldn’t need formal laws. Sadly, they can’t.

But regulators are human and regulations are crafted by imperfect people. It’s easy to write hard-and-fast rules, but entrepreneurs are all about innovation; regulation often seems to be fighting the last war. Strict rules become outdated and get circumvented. And the proof is in the pudding: the regulated banks were ground-zero for the last crisis; the unregulated hedge funds largely went unscathed.

Because both free markets and regulation are imperfect systems peopled by imperfect actors, we will never strike a perfect balance. Instead, the pendulum will swing from one tendency to the other. Our financial system will continue to be imperfect, working well 95% of the time for 95% of the people. But it will create large risks the rest of the time.

Money is a societal convention and financial rules will be ever with us. Free markets do the best job of allocating resources; but the ride will always be bumpy.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-12T10:44:11+00:00 July 19th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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