The 2008 financial crisis continues its grip on the U.S. economy. But what caused it, and will additional economic regulation be a help or a hindrance?
These questions were at the center of the “Conference on the Future of Securities Regulation,” sponsored by the Mendoza College of Business and held at the campus of the University of Notre Dame on April 23-24, 2009. The event brought together regulators from the U.S. Securities and Exchange Commission, academics, and industry economists to discuss these issues. Speakers included James Overdahl, chief economist for the SEC, and Chester Spatt, chief economist of the SEC from 2004-2007.
The speakers raised several key points, said Finance Professor Paul Schultz, who organized the conference. Among them were:
- Is short selling a harmful practice? In September 2008, when many bank and financial stocks dropped dramatically, there was a fear that short sellers were driving down stock prices, which might lead to a run on banks. The SEC responded by banning short selling in 1,000 financial stocks for three weeks. Professor Charles Jones from Columbia Business School found that the ban temporarily bumped up the price of financial stocks, but they continued to slide and their market quality declined. “The conclusion of most (attendees) was the ban was a bad idea, a case where politics trumped economics,” Schultz said.
- Is “Say on Pay” a good idea? This concept gives shareholders a nonbinding vote on CEO pay. A board is not required to reduce pay, but it usually responds to shareholder pressure. Fabrizio Ferri, assistant professor at Harvard Business School , noted that a law like this was enacted in the United Kingdom in 2002, which resulted in pay more linked with performance, but little overall change in compensation levels. It may be a part of new financial regulations in the United States.
- How did credit rating agencies drop the ball? Many mortgage-backed securities and other derivatives that failed dramatically had high ratings. There is some concern that rating agencies lowered their standards in 2006-2007 to obtain more business from the companies they rated. James Vickery, an economist with the Federal Reserve Bank of New York, was the presenter.
On the current proposals to regulate financial markets, Schultz commented that some are good and not controversial, such as regulating insurance at the national rather than state level, thus eliminating inconsistencies. Other proposals are more controversial, such as a consumer financial protection agency, which might lead to regulators “micro-managing” banks and lenders.
While some speakers voiced concern that there will be heavy-handed regulation and that the regulation process will become more political, most were optimistic that the U.S. financial system is resilient, “and we will get through this,” Schultz said.