Page 72 - Accelerating out of the Great Recession

THE NEW REALITIES

gence of highly speculative investors, the damage that can be
caused by unregulated financial innovation, and the misalign-
ment between executive pay and long-term performance. The
Obama administration has proposed a new regulatory regime;
the European Union (EU), BIS, the G-20, and the
International Monetary Fund (IMF) all have made their own
(variously overlapping) proposals. It seems certain that more
regulation of the financial industry will be the result.
A harmonized global regulatory regime is unlikely because
several countries—particularly those with strong financial sec-
tors—are reluctant to impose overly strict rules, fearing that
they could lose their competitiveness. But financial sectors still
will be affected by the efforts to strengthen domestic regulatory
regimes. These efforts are likely to bring within the regulatory
framework alternative investors such as hedge funds, as well as
the previously unpoliced over-the-counter derivatives markets,
whose potential to affect the financial system is not matched
with a commensurate level of oversight.
Financial institutions will not be the only businesses affected
by regulatory constraints. As politicians regain some of the
power and influence they lost during the boom years of private
enterprise, they will intervene more prominently in a range of
industries in order to protect domestic companies, limit compe-
tition, and regulate earnings. Obvious candidates for more
intense regulation include the energy and health care sectors—
both of which attract close public scrutiny.
Health care has already been catapulted to the top of the U.S.
political agenda. And given the high and increasing costs of
health care, along with huge and mounting government deficits,
the United States (and other countries) will need to identify
areas where savings can be achieved—for instance, the pharma-

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