While some policymakers are sympathetic to shrinking the government’s role, most are hesitant about getting the government out of financial markets. They tend to view financial markets as a special case, an area of the economy that requires extra intervention to keep people safe.
Sound Financial Policy Guide Makes the Case
Contrary to conventional wisdom, there is no such requirement for financial markets. My Cato colleagues and I make that case every day. My new book (with Jennifer Schulp) does it, and our new Sound Financial Policy guide for the 119th Congress does it, too.
The policy guide explains that financial regulation can, in fact, be relatively light touch. Contrary to popular opinion, financial regulation can be based on rules that mainly protect people from fraudulent behavior. Financial regulation simply does not have to be based on restricting what people can do with their money because regulators deem certain products or behaviors as “too risky.” Financial losses don’t have to be backed up by the government, and that process comes with its own set of risks.
Yes, this new approach would mean that more people must exercise caution and good judgment, knowing they will make mistakes. But that’s what people should always be doing. In a more rational system, it would be called reality.
The tragedy is that the current approach—a group of officials trying to dictate that financial outcomes will be great if only everyone else follows their rules—does not work.
Regulators make mistakes because they’re people, too, and nobody has perfect foresight. It should surprise no one that financial losses and crises haven’t disappeared from American financial markets. The current approach merely trusts regulators’ judgment instead of the judgment of people in the markets.
As a result, regular Americans have increasingly lost the ability to do what they want with their own money. And they are not safe from financial crises. The current approach leaves us with little more than a massive set of rules and directives that enrich the well-connected and harm regular Americans.
Trump Must Work With Congress
Early indications are that President Trump is more engaged with Congress than during his first administration, and that’s great news. It is true that the first Trump administration had some success stemming the regulatory tide, but many of those changes were temporary. Because they were done administratively, the Biden administration was able to easily reverse them.
If President Trump wants to make lasting positive change, his administration will have to work with Congress. But as our policy guide shows, there are many ways that Congress can start reversing the reach of the administrative state. (And Cato’s DOGE report does the same for pretty much everything outside of financial market regulation.)
Housing finance alone is ripe for major improvements. To get started, Congress could narrow Fannie Mae and Freddie Mac’s focus to the financing of primary homes and limit the Federal Housing Administration’s single-family insurance portfolio to first-time homebuyers (as opposed to people who haven’t bought a home in the past few years).
Congress could also revoke Fannie and Freddie’s exemption from the requirement to register their securities offerings. There’s no real justification for it and it provides a radically unfair advantage compared to other public companies. (Yes, they register voluntarily now, but the exemption feeds the implicit backing by the federal government.)
Financial privacy is another area that needs major attention. For decades, Congress has expanded the reach of the Bank Secrecy Act, all but destroying financial privacy. Americans’ financial records now enjoy none of the Constitutional protections that the 4th Amendment confers on their other property. Congress can fix this problem by amending the BSA so that law enforcement needs to obtain a search warrant to see their records, just as with any other criminal investigation.
Too Many Reforms to List
Beyond these core reforms, many specific regulatory changes would improve both capital markets and banking.
Congress can, for example, open all private offerings to investments from any investor, regardless of their wealth. They could also create a de minimis exemption for any private offering of less than $500,000 and better support initial public offerings by limiting disclosure obligations. There’s also no need for more than one capital markets regulator.
There’s a similar problem in the banking sector—banks do not need more than one federal regulator. There are multiple approaches because so many agencies are currently involved in regulating banks, but there are too many redundancies to ignore.
If they want to fix the problem, Congress could make the Office of the Comptroller of the Currency the federal regulator for all banks with more than $15 billion in assets. (It’s an arbitrary cutoff; they shouldn’t get hung up on the number.) Then, they could make the Fed district banks the federal regulator for banks with less than $15 billion. Next, they could remove the Consumer Financial Protection Bureau’s examination authority and turn the Federal Deposit Insurance Corporation into a (nonregulating) bank resolution agency that administers deposit insurance. They could cap it off by eliminating the Fed’s Vice Chair of Supervision.
These changes would be a great starting point, and we’ve offered countlessother ideas. Just as in other areas of the economy, excessive government regulation and involvement in financial markets prevent companies from best serving the needs of their customers and, therefore, society.
Hopefully, the new Trump administration and the 119th Congress will see things the same way and start moving America in the right direction.
