Calls for new regulations for financial industry participants are in the echoing about and are likely to increase in volume over the next couple of months. The subject is expected to be at the top of the agenda for the April meeting of the G-20.

An article in the WSJ on Monday set the tone:

The European leaders of the Group of 20 agreed Sunday that all financial markets, products and participants, including hedge funds, must be regulated and that any measures that might distort competition must be minimized, according to the summary of the meeting issued by Germany.

Little doubt there about the “animal spirits” of Europe’s politicians is there. Now, no one is going to argue that we don’t need to rework our regulatory regime but these things are best done with a lot of quiet deliberation not in the middle of multiple crises. With that in mind let me suggest a few things that ought to be considered from the outset.

1. Don’t rush. It took years to write the securities legislation that came out of the Great Depression. Those statutes have actually worked exceptionally well, probably because the framers took their time and thought things through.
2. Don’t automatically assume that a European solution is a good solution for America. I wrote a post earlier today (link here) supporting our dispersed banking system. It’s unique and has some special strengths. It isn’t necessarily amenable to a set of rules designed to regulate a small group of universal banks. U.S. regulation can be complimentary to Europe’s without being identical.
3. Do be prepared. Have some broad concepts in mind before you sit down at the table. If you don’t know what direction you want to go, the Europeans will take you along their path. They know well where they want to go.
4. Think about alternatives. You don’t necessarily have to have every financial service firm in the country under your thumb. For example, the NYT suggested that controlling the amount of leverage available to hedge funds could be just as an effective means of regulation as direct intervention.
5. Remember that you have to deal with a continental country of over 300 million people and literally milliions of financial service firms. You can’t control it from Washington. Figure out how to enlist the assistance and probably help fund truly effective regulation at the state level.
6. Whatever you design do so with the certainty that the day after it’s signed into law very smart people will be looking for holes. Be flexible and try and keep in mind that innovation will happen despite your best intentions. Write rules that can adapt to changing circumstances.
7. Figure out how to do all of this without creating a vast new honey pot for the tort bar.

New regulation is going to be a tricky exercise to get right. Do it wrong and you risk the economic viability of the country. Done properly, it can go a long way towards creating a fertile environment for growth.