SEC Commissioner Questions Approach

By Lisa Valentine

“Even during times of severe hardship, it remains possible for regulation to go to far,” SEC Commissioner Troy Paredes said in a speech to the Corporate Directors Forum on July 13. (Before beginning his remarks, he did note that his views are not necessarily the views of his fellow SEC commissioners. No doubt.)

Finally, we have heard from a government regulatory official voicing concern that the regulations being bandied about that would lead to an expanded role for the Federal Reserve and increased registration requirements for financial instruments normally under the government radar may be too, shall we say, enthusiastic.

Paredes describes how regulation can feel good today (yes, we’re taking action!) yet not be in the best interests of the economy. Too much regulation often translates into fewer job opportunities, lower investment returns and stifled innovation.

He also wisely questions how systemic risk will be determined. In concept, systemic risk sounds like a plague on the economic condition and something that should be stamped out as soon as it becomes apparent. But as Parades points out, just because the government thinks it knows what systemic risk looks like doesn’t necessarily mean that the government knows what to do about it. He asked, “What does it mean for a firm to be “too big” or “too interconnected” to fail? A sort of “I know it when I see it” approach to regulating systemic risk is untenable. Such open-endedness accords the regulator too much discretion and is too unpredictable.”

Paredes is preaching to the choir with that remark. In its haste to assure the Obama administration and the U.S. public that it is deserving of its role as an all-knowing, all seeing soothsayer of systemic risk, it’s just too darn easy for the Federal Reserve (or any government agency) to overreact. While the results of not reacting can be severely unpleasant, the dangers of overacting can be just as detrimental in terms of loss of innovation and a lack of new financial products and credit and business lending to support those entrepreneurs who will drive economic growth.

Regulatory agencies, be careful what you wish for. Having more regulatory power is not necessarily better. Sometimes the government needs to step back and be still and let markets work. As Paredes stated, “Risk is unavoidable. When we regulate risk, something else pops up.”