Creating an Office of New Markets

Newsweek has an informative article on the credit default swap market which started out as a new technique for allowing capital to be invested and ended up as the $62 trillion unregulated market--the "monster that ate Wall Street."

Some people never learn. Stanford economist Darrell Duffie responded to a question about outlawing credit default swaps by claiming that "the financial engineers will just come up with something else that gets around the regulation." Of course, this is the old conservative cliche that reform will never work because the corporations will always figure out new ways to shaft people.

But it might end up being pretty easy for the government to regulate capital markets.

All Congress would have to do is create an Office of New Markets in the Security and Exchange Commission or Federal Reserve Board that keeps an eye on new types of financial instruments and keeps Congress informed of the innovations--like credit default swaps--that threaten to destabilize the marketplace.

Obviously, there would be a lot of ways to try to get around that regulatory framework, but the connection of such an Office to Congress would make it possible to hold Congress responsible for markets that got out of hand.

That way, new regulations can be brought on-line as the impact of new financial strategies becomes clear.