April 24, 2012
Special Forum: JOBS Act - A Political Puzzle
Posted by Brett McDonnell

For the last several months I have been working on a paper exploring political cycles in financial regulation. The core argument is that ideally regulation should be countercyclical, getting tougher during booms to help guard against bubbles, and loosening following crises to put fewer obstacles in the way of financial market recovery. And yet (so the argument goes), actual regulation tends to be procyclical, getting looser during bubbles while stronger new rules are introduced following crises. Many have noted the pattern, from John Coffee (in the paper where he notoriously created the label of the Tea Party Caucus) to Roberta Romano (whom Coffee labels a leader of that Caucus), although those two differ critically as to which phase of the cycle they find particularly problematic (my attempted contribution is to sort out where these variants of the story agree and disagree, and to try to referee among them).

Before the paper is done, along comes the JOBS Act, and it's quite an embarrassment. Here is a significant deregulation of securities law while we are still in hard times caused by the worst worldwide financial crisis since the Great Depression. Falsified before I even publish. So, I am struggling to understand what happened. Bob's post is a great help. Currently I am split between three different stories, two pessimistic and one more optimistic.

Pessimistic story one: we are in a new age of limited regulation. Dodd-Frank was a limited anomaly doomed to be strangled in the crib as the financial industry captures the implementation process; the JOBS Act is a return to the new normal. For those of us who see a real if limited role for significant new regulation (the Occupy Wall Street Caucus?), this is discouraging.

Pessimistic story two: Congress is random and thoroughly uninformed. Dodd-Frank is random and poorly informed reregulation, while JOBS is random and poorly informed deregulation. The two parties are struggling for political advantage in a hostile environment which they don't understand, and if someone manages to come up with a package with a pretty enough bow (that name!), it passes no matter what's inside.

Optimistic story: we've matured to a point where we can pass plausible deregulation as a form of regulatory stimulus, as Erik puts it, while still being able to enact new regulation in areas where the crisis showed we have a need. Obviously, much depends upon how plausible one finds the provisions of the JOBS Act. I must say, my first impressions were actually pretty positive. I am particularly attracted to the IPO on-ramp, while being more ambivalent on crowdfunding. But as Joan says, the devil is in the details. Hence, I am looking forward to the analysis from my better informed colleagues.

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