The US as Global Risk Generator

Kevin P. Gallagher

The U.S. economy continues to have a hard time recovering from the biggest financial crisis since the Great Depression.

So the last thing one would expect the U.S. government to do is to engage in policies that open the floodgates to severe risks in financial markets once again.

And yet, that is precisely what’s going on.

For all the attention that is paid to the Federal Reserve’s “tapering,” what Washington has in its crosshairs is something quite different.

Dodd-Frank left most of the actual detailed rule-making to rein in the industry for later.
It is putting massive pressure on the Commodity Futures Trading Commission (CFTC) and the Security and Exchange Commission (SEC).

Unless concerned policymakers — and the public at large — act quickly to counter that pressure, the disastrous past — a financial industry running amok — may well be not just be the United States’ national, but our common global future.

How is this even possible?

Even though the U.S. Congress passed the Dodd-Frank financial reform law a few years ago as a bulwark against reoccurring financial crises, the legislation actually left most of the key decisions — the actual detailed rule-making to rein in the financial industry — for later.

Wall Street met with officials to influence new rules five times more often than public interest groups.
At the center of this entire issue is Gary Gensler, a former Goldman Sachs partner, who is now the Commodity Futures Trading Commission Chairman.

Mr. Gensler is one of the few officials who can credibly say that, having worked in the lion’s den for many years, he is committed to rectifying what he knows is truly troublesome in the boiler rooms of the American financial industry.

And yet, the deck is stacked against him. The fundamental imbalance at the heart of this issue is not just very irritating, but also profoundly undemocratic.

Just look at the numbers. The Sunlight Foundation found in a study released last year that Wall Street has met 1,298 times with government officials to influence the new rules.

In sharp contrast, public interest groups have only been able to get 242 such meetings. Talking about being outgunned — by a factor of five to one.

But this unsettling imbalance in the U.S. political process has consequences way beyond U.S. borders. Not only is the U.S. financial industry still in a dominant position globally, it’s setting many of the standards and practices for “what goes.”

The US financial industry, beyond its dominance, is setting many of the global standards and practices.
The G-20 and the Financial Stability Board pledged that powerful nations like the United States would see to it that the global impacts of their national rule-making would be taken into account.

But now the United States may blow a hole in the Dodd-Frank law that would allow many of the key global operations of U.S. banks to be entirely exempted from regulation.

The first blow came late last year.

Very quietly, when the U.S. Congress was on its Thanksgiving holiday, the U.S. Treasury Department exempted foreign exchange (FX) swaps and forwards from the regulations.

Why should the American and global public care about this?

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