U.S. Recovery Could Be Hurt by Fear of New Regulation

Too many regulators currently watch over U.S. companies and a fear that some industries may soon face even more rules could be hurting the U.S. recovery, two top financial industry executives said.

“We need a lot fewer regulators,” Robert Kelly, the chief executive officer and chairman of Bank of New York Mellon Corp said at the 2009 Milken Institute Global Conference Monday.

Regulation has become a hot-button issue in the last months as Americans try to diagnose how the country tumbled into its worst economic crisis since the Great Depression and how to prevent a similar downturn from happening again.

Some critics say corporations and consumers got into trouble by taking overly big risks when no one was watching them and could stop them.

But Kelly said the problem is that there are too many agencies watching. With regulators on a state and federal level there was overlap and confusion about who was responsible for what. That led to things falling through the cracks, he said.

Other critics said the crisis happened because there were no real rules to stop risky behavior.

Kenneth Griffin, the founder and CEO of $8 billion Citadel Investment Group, one of the world’s largest and most powerful hedge fund firms, said the regulatory agencies and their rules are solid. The problem is they were not properly enforced.

“Overall, the regulatory frameworks are solid, but there was a lack of will around enforcement,” Griffin said. “This is not the time to rewrite it in the next 12 months.”

On a national level, Kelly said the country needs one or two regulators who watch over the type of activities companies engage in.

For example, he said that insurance should be regulated on a national level not by 50 individual states.

He also said more cooperation on an international level would be useful in preventing future crises.

As corporations try to repair the damage, however, there has been a growing chorus calling for stricter rules.

“My guess is that we are going to over react,” said Michael Boskin, a economist and senior fellow at the Hoover Institution when asked what any future rules may look like.

And this is exactly what makes financial corporations including banks and hedge funds so nervous about the future, Griffin said. He said the uncertainty prevents firms from planning properly.

The U.S. government must stop cobbling together “one-off solutions for Citi or Bank of America” and instead create an overall regulatory framework that would allow bankers to plan with more certainty, Griffin said. (Reporting by Svea Herbst; editing by Carol Bishopric)