President-elect Trump and Treasury Secretary-elect Scott Bessent I drew a difficult hand.
We all know about this country's ballooning national debt, the continued decline in purchasing power for many Americans, and the many other chronic economic challenges facing this country. But it's the threats we don't see or hear that pose the most immediate and grave dangers. Chief among them is the country's outdated and inefficient financial regulatory system. The increasing inability to predict or avoid market anomalies is a direct bridge to the next American financial panic.
Established in the 1930s, the network of regulatory oversight agencies now includes nearly a dozen federal regulators, as well as 50 U.S. states and 16 attorneys general, and banking, securities, and consumer protection regulators. territory. But in cyberspace, where products are available online and national borders mean little, these nearly 200 regulators are constantly bumping into each other, regulating the same things at the same time.
The country's banking regulatory infrastructure was built after the Great Depression, primarily to prevent runs and protect depositors. As a result, it relies heavily on broad ratios and rules, assuming that if all banks comply with them, both the banks and the system will be sound. But as one financial disaster after another proves, nothing could be further from the truth.
The financial world has become cluttered with unsupervised funds, fintechs, crypto companies, and a wide range of non-bank intermediaries, inevitably leading to companies whose high-risk financial activities are beyond the jurisdiction of banking regulators. I am now drawn to it. Consider the financial crisis. FTX, Binance, synapse And a growing number of other new economy companies are happy to skirt the regulatory radar and fly too close to the sun.
As a result, the broader financial system is safe and secure even though most of the country's regulatory resources are spent ensuring that all banks meet applicable capital and liquidity ratios. It no longer means that banks cannot fail due to risks incurred or assumed by unregulated companies. As in 2008, the economy will fall into crisis.
We need to build smarter regulatory mousetraps relevant to the current economy to prevent the next financial crisis. To that end, Donald Trump and Bessent need to work with Congress to launch four important initiatives.
Businesses celebrate when their competitors are regulated, but these days new economy companies are partying hard. Although banks have become a minority in the new financial services business, they remain the only ones whose activities, capital, liquidity, and leverage are subject to unparalleled cradle-to-grave oversight as determined by federal and state law. is a company of
In contrast, the new majority of financial services companies are free to overleverage and accumulate risk without government oversight. Such regulatory imbalances led to financial panics in 1907, 1929, the 1980s, and 2008.
There is handwriting on the wall. An effective surveillance system should regulate companies (whether banks or non-banks) in which the public's money is invested and whose integrity can affect financial stability.
The new digital economy poses challenges to federal deposit insurance and its goal of providing peace of mind to depositors. rapid end silicon valley bank He highlighted how social media can instantly erode trust in financial institutions. and more 40 percent bank deposit uninsuredfinancial markets have become more volatile, especially given the increased uncertainty about which depositors and businesses will be bailed out if the financial crisis undermines the stability of the system. We need to rethink how much of the funds held by whom and what kind of trustees need to be guaranteed in a rapidly changing digital economy.
Given the speed of this economy, any financial surveillance system that is not real-time based and cannot make intelligent predictions is doomed to be ineffective. The current regulatory system for measuring banks' historical performance has served them well in times of slow economic activity. But today, effective regulatory systems must be able to measure risk in real time, predict alternative future scenarios, and model a range of corrective actions that regulators can consider.
The increasing use of AI technologies by financial companies can only be effectively monitored if regulators are equipped with similar technological tools and capabilities. it's not. The best way to do that is to revamp the regulatory model from an adversarial to a collaborative one, with the public and private sectors contributing what they know and what they do best to the oversight process.
Virtual currency business is darling of the counterculture It has long passed the stage where it should be regulated. Crypto coins, crypto-based derivatives and ETFs are on the horizon, including leverage created at the time of purchase. 10 trillion dollars. It is approx. 85 percent The size of the U.S. direct mortgage market as represented by a random algorithm with no underlying values. Virtual currencies currently have the potential to impact the stability of the U.S. economy and should be regulated as such.
People should have the right to lose money in speculative ventures like cryptocurrencies. But when your investments double as money, you enter a different world where trust and stability are important. Floating rate cryptocurrencies have no intrinsic value and can be issued, sponsored, or controlled by people we can't even find. Even if we know who they are, they don't have to prove their expertise, experience, or integrity, just like everyone else in the financial services industry.
Almost every time in history the value of a new speculative product has risen irrationally, it has been followed by an economic collapse. And the rise of cryptocurrencies has never been more irrational.
Cryptocurrency has become a major instrument financing Criminal enterprises, hackers, drug traffickers, terrorists, human traffickers, providers of child sexual abuse materials, illegal arms dealers, etc. To make matters worse, cryptocurrency hacking is now North Korea's primary means of raising funds. Its nuclear development program.
There are many difficult economic choices ahead for the president and the next secretary. They know they don't want a financial crisis to happen on their watch, so they appoint people who want to do more than act as custodians of a broken system, and the country's outdated regulatory system. We need to modernize and organize our resources to address the problem. 21st century market risks.
Thomas P. Vartanian has served as a banking regulator for three different agencies and as a financial services attorney. He currently serves as Executive Director of the Center for Financial Technology and Cybersecurity and is the author of 200 Years of American Financial Panics and The Unhackable Internet.
