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‘Balkanization of US financial system spelling doom for economy’

A view of the Federal Reserve September 17, 2015 in Washington, DC. (AFP)

America’s ‘Balkanized’ regulatory system set up to prevent another financial crisis is a “mess” and bound to fail again, experts say.

“The current US institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be,” said Adam Posen, president of the Peterson Institute for International Economics, at a two-day conference on financial stability sponsored by the Boston Federal Reserve.

Posen said US regulators, including the Fed, do not have the tools or the mandates from Congress that they need, a MarketWatch report said.

Posen was especially critical of the umbrella group of regulators, the Financial Stability Oversight Council (FSOC), which was set up to identify and deal with financial stability risks.

He said FSOC is chaired by the US Secretary of Treasury, who is the most political member of the group.

Meanwhile, Mervyn King, the former head of the Bank of England, also believes that the US institutional structure was a problem.

“It is before the crisis that the US set-up is to be questioned,” King said.

Former Fed vice chairman Donald Kohn agreed: “broader and deeper structural deficiencies exist in the US regulatory system for macro-prudential regulation.”

Kohn said there is a widespread perception in Washington that the Fed is responsible for financial stability, noting that in reality the Fed must work in a “Balkanized” regulatory system.

He agreed that FSOC “cannot remedy the underlying flaws of financial regulation in the U.S.”

The 2008 financial crisis is the worst economic disaster since the Great Depression of 1929. It happened despite efforts by the Federal Reserve and Treasury Department to prevent the US banking system from collapsing.

It led to the Great Recession where housing prices fell 31.8%, more than during the Depression.

Two years after the recession ended, unemployment was still above 9% -- and that is not counting discouraged workers who had given up looking for work and were no longer counted among the unemployed.


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