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FinReg and the US Financial System

FinReg and the US Financial System. Economics 437. Financial Regulation. The “Bailout” Fund Derivatives restrictions Separate derivatives trading from investment banking Make derivates trade through exchanges Unlimited power of FDIC to guarantee depositors (all depositors)

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FinReg and the US Financial System

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  1. FinReg and the US Financial System Economics 437

  2. Financial Regulation • The “Bailout” Fund • Derivatives restrictions • Separate derivatives trading from investment banking • Make derivates trade through exchanges • Unlimited power of FDIC to guarantee depositors (all depositors) • Unlimited power to the FED to use garbage collateral • The CFPB (a Fed remake of the CFPA) • Proxy access for large shareholders

  3. What Caused the Financial Crisis in the First Place? • Government housing policy • Tax deductions for mortgage interest • Tax free capital gains on home sales • Fannie and Freddie • “Too Big to Fail” policy • Removes market discipline for bond holders and, in some cases (Citigroup, AIG) for equity holders • Provides incentives to speculate

  4. What Did Not Cause the Crisis • The Curious Case of Goldman Sachs • Greed and corruption on Wall Street • Predatory lending • An absence of regulation (or regulatory enforcement) • The rating agencies

  5. So what does FinReg fix? • Doesn’t change govt housing policy • Creates permanent “too big to fail policy” for virtually all financial institutions (at taxpayer expense) • What bad things does it do • Greatly restricts risk controls for investment banks • Dramatically reduces available credit to lower and middle income Americans

  6. End

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