A repeat of the May 6 “flash crash,” the largest one-day point decline in Dow Jones Industrial Average history, is possible due to vulnerabilities within regulatory bodies, former SEC Chairman Harvey Pitt tells Newsmax.TV.
The crash, in which a mutual-fund trade sparked a technology-fueled selloff, could be better prevented with the installation of regulatory tripwires that give the right people the right information in real time, says Pitt, chief executive officer of consulting firm Kalorama Partners.
More bureaucracy isn’t the answer, Pitt says, pointing out that the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) took five months to publish a report on what caused the incident without focusing enough on preventing a repeat performance.
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"Unfortunately, I think the chances are still high," says Pitt.
"What troubles me is that if you read the May 6 Flash Crash report that the SEC and CFTC did, it doesn't instill one with a great deal of confidence. What is absolutely critical is to have a trail of accountability or an audit trail."
Anyone looking for guarantees that such a meltdown won’t occur again will be disappointed, Pitt says, as such promises can’t be made.
The fact that it took the SEC and CFTC five months to produce a report explaining what went wrong “when it should have taken about five minutes” is a source of concern, he said.
"What we want are markets that operate fairly and that aren't subject to the kinds of wild gyrations that go unexplained for as long a period of time that happened after May 6."
Wall Street regulators recently have been cracking down on hedge funds for alleged insider trading, and Pitt points out that many involved may be too young to remember the 1980s, when insider-trading arrests threw images of Wall Street executives being hauled off in handcuffs across television screens nationwide.
He said regulators are attempting to illustrate that the government is “vigorous and aggressive” in policing the markets and “trying to assure the public that investment in the U.S. capital markets remains a fair and appropriately regulated game.”
While the government deserves credit for policing the markets, tough economic times bring out the worst in some people struggling to produce better returns and good numbers, even if that means cutting corners or all-out cheating.
"It's an unfortunate temptation to which a few will always succumb," says Pitt.
So is more regulation needed for a Wall Street that is often criticized by Main Street?
“It’s not so much that more regulation was necessary, what we needed was better regulation and probably better regulators. Unfortunately, we haven’t obtained that.”
He said that while the federal government needs to have all of the power in a true crisis and emergency, it doesn’t need all of that power on a daily basis.
He calls for a way to “limit the invasiveness of the government’s involvement while preserving the protection and systemic-risk oversight” that he said was missing in 2007 and 2008.
Pitt said while the U.S. needed changes to the regulatory system that would enable government officials to be “more nimble” in responding to future crises, the Dodd-Frank financial-reform law fell far short of that goal.
"Instead, what we have is a more ponderous government. Instead of reducing the number of layers of government agencies, we have added two, three and four layers of agencies to the mix," Pitt says, adding that giving existing regulators powers to respond to red flags more quickly would enable authorities to prevent crises.
"Dodd-Frank wanted to do all of those things, it just didn't get it accomplished."
He also said the Dodd-Frank law holds “really scary” consequences for the public because the “cost of all financial services … is going to go up as a result of the massive costs of regulation that Dodd-Frank will impose.”
Pitt gives Federal Reserve Chairman Ben Bernanke credit for trying to stimulate the economy, although the Fed's recent $600 billion bond buyback known as quantitative easing, essentially a money-printing plan aimed at sparking recovery, can’t last forever, as there is only so much money the government can print.
"I think there are concerns that are fair about how much buying back the U.S. government and the Fed should be doing," Pitt says.
"You run substantial risks in undermining the wealth that people in this country have taken years and years to build up. I think there is a reasonable concern about all of these buybacks."
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