I have been reviewing Treasury's Framework for Regulatory Reform and have reviewed several articles about the reforms. In my opinion, something is missing. Some of the proposals offered are good such as increased oversight of the OTC derivatives market or requiring hedge funds over a certain size to register. These proposals should help.
However, no where in the Framework does it say that financial conglomerates were too big and must be made smaller. The proposal for a systemic risk monitor/regulator is troubling because why add another regulatory body to the current web of regulators. What is needed is hard rules, better yet Federal laws, not another regulatory body.
Yes, hard rules/Federal laws such as the late Glass-Steagall Act. Hard rules/Federal laws that prohibit bank holding companies from being the one-stop shop for everything under the sun and are capable of conducting a "shadow banking" system. It seems we never learn from history - especially extremely recent history. "Too big to fail" is bad.
There is nothing in the framework that prohibits "too big to fail". The framework calls for monitoring or "regulating" financial conglomerates. However, what happens if the new systemic risk regulator is a sleep at the wheel and misses the signs of financial conglomerates becoming too risky? We know this is possible. How about this systemic risk regulator is led by someone who despises regulation or whose perceptions of risk are much different than normal? We know this is possible.
I agree with Nassim Taleb when he said in an CNBC interview (it is posted somewhere on EP) that a complex global financial system needs robustness and not fragility. A robust system is created by smaller institutions and more competition. This is definitely contrary to those who argue that we need to preserve "too big" financial conglomerates because they are more efficient. But I missed how they are more efficient especially considering our current economic situation.