Post-Financial Crisis Regulation: Stultifying Innovation in the Name of Safety?

This week, Michael Callen, CEO of Amcap, a financial services company headquartered in NYC, spoke at Haas about the financial crisis. I can't do justice to his entire speech in this blog, but I did want to comment on one point he made toward the end. Mr. Callen spoke about government regulation, a theme touched upon by many recent speakers at Haas. What I found striking was that even in light of the tremendous loss of wealth and jobs over the past few months, Mr. Callen was adamant that government regulation is not needed.

Mr. Callen said, "Regulators will not be capable of doing anything but stultifying innovation in the name of safety." He went on to say that he has never seen regulation be effective, and "markets get it wrong, but they correct. Regulation is very slow to change."

Of course like any speaker, Michael Callen comes with a personal bias. As CEO of a financial services company, Mr. Callen could experience personal financial gain or loss depending on goverment's policies. However, he does have a valid point about government regulation's speed to change. In corporate America, I wasn't elected to my position, and the number of people I had to influence to make change was relatively small. Even in my role as a business analyst, the choices I made and the decisions I helped to facilitate could influence big dollars on the bottom or the top line. My job often required convincing my business partners to change their processes in response to new business realities. Unlike a politician, my arguments for change were not reduced to sound bites. Often I feel like politicians who recognize that an existing policy has good intentions but needs to evolve to be effective have a difficult time doing so because their aims can be distorted. Suddenly the politician with good intentions and great ideas is against children, the economy, the environment, Joe the Plumber, or American manufacturing. And who would re-elect a politician who doesn't stand for our children? It is difficult to change a law from good to better or to update a law that was good in the past but needs to evolve to be effective.

Our government failed to recognize the threat presented by CDOs, highly leveraged banks, and non-traditional bank activities. How could we regulate to prevent a threat we didn't even see? Now that the crisis has occurred, I agree with Mr. Callen that to some extent the market will self-regulate. Each financial institution will seek to minimize its own exposure to such risks in the future. However, I disagree with Mr. Callen that no regulation is needed. In my mind, perhaps the role of government should be to better facilitate this self-regulation by requiring more transparency.

Regardless of what policy is implemented, in 18 months I need another job, and thanks to a pricey business school education, I will have some big loans to pay. My fingers are crossed that the economy turns around by then!