Building Effective Regulatory Agencies
Kevin Drum is sick and tired of arguing what to do with the current banks, and wants to talk about new rules going forward:
The fact is that these people did what they did not because they’re stupid, but because the system practically begged them to act the way they did. That’s what’s broken, and fixing it depends mostly on what kind of new financial regulations we put in place going forward. I guess we’re still in firefighting mode and don’t have time to address that right at the moment, but I’d sure like to start hearing more about it sometime soon. In the long run, figuring out an effective way to regulate leverage, wherever and however it appears, is probably a lot more important than deciding which bureaucratic solution we should use to clean up the corpses currently littering the battlefield.
I’ve been to a number of meetings on this where learned people discuss the future of financial regulation, and a few points keep coming back. One is that regulators arguably already had the authority to nip this problem in the bud. The other is that had regulators tried, only to be met with a decree that they lacked sufficient authority, they always could have gone to congress, laid out the problem, and asked for additional authority. The last is that had any such thing taken place, political pressure probably would have beaten it back. Think about it. Suppose a very senior career civil servant had tried to take action back in late 2005 or early 2006 to bring the party to a premature close. Well, we know the financiers and homebuilders getting rich off the action would have pushed back. And we know that the conservative movement, at that time, deemed anyone who alleged the housing market was looking bubbly to be driven by a partisan antipathy to George W. Bush. What would building trade unions have thought about our regulator? Or Harry Reid from bubblerific Nevada?
It’s just very hard to imagine, in the United States political system as it works, civil servants really being able to crack heads and prevent wealthy individuals from doing something that they want to do and that appears to be benefiting a fairly wide group of other people.
At which point the issue becomes, in my mind, less an issue of how would you write better-written regulations and more an issue of how would you create a more effective regulatory agency? In my view, it would require you to make the senior regulators the kind or prestigious people whose views are taken seriously by the media and the congress. The U.S. isn’t such a small government country that we dismiss all public servants out of hand. When a General or Admiral speaks, people listen. And part of that is that even a Colonel or a Lieutenant is a well-respected figure, and everyone appreciates the sacrifice and public-spirited nature of even the lowliest enlisted officer. Similarly, though the Federal Reserve system may yet find a way to discredit itself, the idea that the Fed Chair should have a lot of power and that his views should be taken seriously is pretty widely held.
The S.E.C. and the F.H.A. and all the rest aren’t even remotely like that. But a President interested in building a new effective regulatory system would need to do something to make them more like that. Probably a new, more consolidated agency. With a new name and a new logo. And you’d need to bring in a few people from the outside to head it up initially, who are seen as respected and having clout. But beyond the first wave, you’d want to professionalize the organization and not have very many political appointees. And in the early years, you’d need to make a conscious effort to show that well-meaning politicians are deferential to the regulators and take their ideas seriously—to establish the presupposition that anyone who doesn’t treat the regulators somewhat deferentially is dodgy and untrustworthy.
Then you’d have an agency that would not only have some kind of authority to regulate leverage. You’d have an agency that if it saw institutions coming up with a clever way to elude its authority could credibly go to congress and the public and ask for changes. What you need is a situation where, if the agency asks for the changes, people see it as public servants looking for authority to clamp down on dangerous activities, not as stodgy bureaucrats getting in the way of all-wise Heroes of Capitalism.
36 Responses to “Building Effective Regulatory Agencies”
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March 11th, 2009 at 9:05 am
The problem with this Matt is we had those agencies and they were then allowed to change and deregulation allowed what happened to happen. The S&L crisis came about because S&Ls were deregulated. The banking crisis came about because banks finally got rid of Glass-Steagall.
March 11th, 2009 at 9:09 am
Agreed. Congress’s grandstanding by berating SEC officials and telling them they suck over the Madoff scandal is such a joke given how they starve the bureaucracy and denounce it everytime they stick their head out and actually try to regulate.
March 11th, 2009 at 9:10 am
Actually, the Prime Directive is to reform the fucking News Media so that the American People get real information.
The President, arguably, has a lot to do just executing policy — and Low Bandwidth, Early to Bed George was particularly overwhelmed.
Congress, in contrast, is supposed to look ahead and address problems before they grow. Obviously, that doesn’t help when Congress is run by a pack of corrupt Republican whores.
But the People need to know the CONSEQUENCES of electing Republican whores. The Congressional Committee responsible for monitoring the economy is the Joint Economic Committee –with close ties to the Banking Committee.
The fact that the New York Times has REFUSED to examine the failure of the Joint Economic Committee in 2004-2006 –to hold Senator Bennett and Congressman Saxby responsible for the Reports which dismissed warnings in that period — is the real problem.
WHen your major newspaper is a Whore for Wall Street, it’s kinda hard to hold elected officials responsible for corrupt negliance. Even when it costs the taxpayers $10 Trillion and ensures millions of Americans will die before their time due to lack of health care.
March 11th, 2009 at 9:13 am
One thing I hope that Obama adopt is Elizabeth Warren’s idea on regulating mortgages like drugs and toys:
I think this is an excellent idea this would prevent fraud.
March 11th, 2009 at 9:14 am
Former ambassadors get quite a bit of respect in US civil society. But when the scenario arises that they “crack heads and prevent wealthy individuals from doing something that they want to do and that appears to be benefiting a fairly wide group of other people”, they get clobbered just the same, cf. Freeman, Chas. And in fact the same is true re. Generals etc on procurement decisions.
What you need is a political system which can radically reduce the influence of powerful and wealthy small groups in Congress. Everything else – such as redesigning regulatory agencies, new logos etc – is trivia.
March 11th, 2009 at 9:14 am
In fact, the learned folks you heard were wrong.
AIG avoided any US regulation by moving the CDS operation to London, and then told the British FSA they were being regulated by French authorities under EU rules. Never audited by the French (who were never told by AIG they had been “selected” as regulators).
The shadow banking system, enabled by Congress, operated outside the regulatory regime, and outfits like Citi did more than 50% of their business via SIV’s not regulated by any agency.
In large part, the excessive leveraging and runaway use of derivatives supported by miniscule proportions of assets(equity) is the crux of the problem.
The thing the regulators increased diligence would have prevented was the Madoff and Stanford criminality.
March 11th, 2009 at 9:14 am
Of course, when a major faction within the Democratic Party is whoring for the same plutocrats as the Republicans, you get a jointly-contrived cover up, not accountability.
Ask Chuckie Schumer, Chairman of the huge pot of money known as the Democratic Senatorial Campaign Committee, what strong new financial regulations need to be imposed.
March 11th, 2009 at 9:18 am
“One thing I hope that Obama adopt is Elizabeth Warren’s idea on regulating mortgages like drugs and toys”
On the contrary, we already regulate mortgages like we regulate drugs, i.e. the amount of regulation is determined overwhelmingly by the pharmaceutical manufacturers, regardless of inefficiencies and externalities imposed on others. That is the central problem.
March 11th, 2009 at 9:18 am
Let me guess how the story goes: the Whores for Wall Street say that new regulations can’t be addressed now because we are in the middle of dealing with the crisis.
Once the crisis passes, however, they will argue that there’s no need for new regulations because everything’s now working fine.
March 11th, 2009 at 9:31 am
I think you mean “enlisted man” instead of “enlisted officer.” Or maybe just “the lowliest private soldier,” which has the benefit of being gender neutral as well as accurate.
We don’t appreciate the lowly enlisted ranks. The higher ones (E-6 and above) get some appreciation, but below that-forget it.
One of the nastier observations in E.B. Sledge’s With the Old Breed comes when Sledge notices that the machines are treated far better than he and his fellow enlisted soldiers. It was true then, and it’s still true. Just ask the guys getting crappy care from the VA, the fellows returning from Iraq to barracks where the bathroom overflows with sewage, the poor schmucks who get tricked into signing statements declaring that their combat injuries are “pre-existing,” or..well, I could go on for a while.
Every so often, there’s outrage over this, Congress or the President acts, rah-rah, rally round our heroes…and then, everyone forgets about it, and the solution turns out not to work. The Call Home Act is a perfect example.
March 11th, 2009 at 9:36 am
Re Nonny Mouse at 10: “We don’t appreciate the lowly enlisted ranks”
———–
I concur — President Bush even banned news photos of their coffins. It’s was like they were used toilet paper or something.
And the photos in the UK’s Daily Mail of the crippled soldiers at San Antonio never appeared in the Washington Post or the New York Times –although they should have been on the front page.
The Post, to its credit, did raise hell over the shitty conditions at Walter Reed.
March 11th, 2009 at 9:56 am
The thing you fail to take into account here, Matt, is that the Federal Reserve, whose prestige you wish to duplicate in a regulatory agency, already had regulatory authority over all of the banks involved in this fiasco. They always had that authority, but did not exercise it due to philosophical (i.e., ideological) considerations. You will always have the problem that the regulators are humans subject to error and, for lack of a better word, political pressure.
March 11th, 2009 at 10:05 am
I’ve been thinking about this point for some time. I think its a pipe dream to expect any meaningful structural change in our political process that would help this situation. Its why I have my doubts about a bailout. As was noted above, the S&L debacle didn’t stop the repeal of Glass-Stegall by a democratic adminsitration less than 5 years after the RTC was wound up.
That’s why I’m thinking more and more that we should let the banks fail and adress the fall-out directly.
March 11th, 2009 at 10:17 am
Probably a new, more consolidated agency. With a new name and a new logo.
This betrays an obsession with the trivia of “branding” and instinctive preference for newness for its own sake. Most people can picture what generals do and even have a vague sense about the Fed’s role in setting interest rates. The public needs to be taught what other civil servant do and why they are important. If the President of the US made a big deal about the head of the SEC and the chief of the enforcement division and those folks acted the part, they’d get plenty of respect. Like Pat Fitzgerald. Mr. 60-something percent favorability has to play his role as Teacher in Chief — a role he is particularly good at when he sets his mind to it. So his more generalized statements about the importance of public service need to be matched by photo ops and speeches about the importance of particular positions/people. Then those people need to show results.
March 11th, 2009 at 10:19 am
What you need is a situation where, if the agency asks for the changes, people see it as public servants looking for authority to clamp down on dangerous activities, not as stodgy bureaucrats getting in the way of all-wise Heroes of Capitalism.
In other words, you need to destroy the Republican Party, which is dedicated to always selling the latter narrative, and the existing media covering business, which ditto.
Tall order. Capitalists have been remarkably successful selling the idea of the heroic wealth-creating manager, considering how little relation it bears to reality.
If most people appreciated the fact that wealth creation occurs at the worker level, and the best the management can possibly hope to do is not steal anything and not screw anything up, so that they maintain the conditions that allow others to create value, then we would have a very different relationship between business executives and the public. But business executives don’t like that worldview and they have ways of enforcing their preferences.
March 11th, 2009 at 10:35 am
Led I could not agree more with your accusation of trivia here. Yglesias seems to be going down the path of Bob-Wright-style fakery in his prescriptions here.
March 11th, 2009 at 10:50 am
Tell it to the land-use planners and people who think we should turn around the forces of sprawl that have ravaged our land. Isn’t this a good summation of the situation in that realm, too?
March 11th, 2009 at 10:57 am
Maddoff proves the point on the lack of regulatory zeal- who was that whistleblower who screamed until he was blue on the face on the multibillion fraud and even showing proof of the shennigans? On creating a new independent agency- I will not dismiss it out of hand but I think it is important to recognize that for untold reasons, the Bush administration became a cult and many decisions in all areas of government were carried out by sycophants. I do not think a democracy can prevent a North Korea type personality cult everyone once in a while and when it happens I am unsure what mechanisms exist to prevent their damage but having an “independent agency” does not seem that strong against a what happened.
March 11th, 2009 at 11:07 am
But beyond the first wave, you’d want to professionalize the organization and not have very many political appointees.
Yes, the next Republican administration, having come to office with big financial industry contributions, will attempt to neuter any such organization by filling it with Harvey Pitt- and Christopher Cox-clones.
March 11th, 2009 at 11:38 am
“One of the nastier observations in E.B. Sledge’s With the Old Breed comes when Sledge notices that the machines are treated far better than he and his fellow enlisted soldiers…”
Enlisted MARINES. Sledge served in the Pacific with the Marine Corps, not the Army.
And here you were getting nitpicky with Matt for saying “enlisted officers”, I suspect he was thinking Non-Commissioned Officers (e.g. Sergeant, Petty Officer).
March 11th, 2009 at 11:41 am
The obsession of Matt and others with the evils of capital is just weird. The problem in fact goes much deeper than just rich people making sure their preferences are met. Do you really think any advocate for the poor would have stood idly by if a real push to limit sub-prime mortgages had been initiated in, say, 2004? Who do you think wouldn’t have gotten homes? Not to mention the racial disproporationate impact of such a move. Everyone, right and left, rich and poor, was in bed on this one. Pretending that the Democrats would have popped the sub-prime bubble any more that Republicans did is absurd.
March 11th, 2009 at 11:53 am
The head of the CFTC, Brooksly Born(?), tried to prevent the increased use of leverage by investment banks, but was overruled by those staunch public servants Robert Rubin, Larry Summers, Alan Greenspan and Arthut Levitt.
March 11th, 2009 at 11:58 am
Beowulf-
In the passage in question, Sledge included everyone who was being thrown into the meat grinder. “GIs” was the word I was looking for. Mea culpa.
I have no idea if Matt was thinking of non-coms, but it’s possible. Maybe he was thinking of warrant officers, for that matter. Or maybe it was one of the many “Stuttgart is in Denmark” moments that are making me think I’m going to put Matt in the same category as Glenn Reynolds: “Writers who I read until their blather/insight ratio became too high.”
March 11th, 2009 at 12:07 pm
Um…campaign finance reform. And changing the title “regulators” to “law enforcement” and moving them to the DOJ.
March 11th, 2009 at 12:21 pm
“Everyone, right and left, rich and poor, was in bed on this one. Pretending that the Democrats would have popped the sub-prime bubble any more that Republicans did is absurd.”
Absolutely agreed. Look, I’ll be the first to admit that I’m a liberal or a progressive or whatever label you want to use. But just because Chris Dodd can push his way to the front of the podium and tell us how he’s working hard to solve the crisis, doesn’t make it so. They were all — Republicans and Democrats alike — swimming in special interest cash from the mortgage and investment banking industries, and were happy to oblige with lax oversight, lame regulation and crippled policy.
And why not? Everyone was benefiting from the housing bubble! Traditional Republican constituents (read: Wall Street) were making money hand-over-fist buying and selling exotic securities with cool acronyms like “MBS” and “CDO”. Traditional Democratic constituents (read: lower income) were able to buy half-million dollar homes with little more than a pulse (and sometimes without a one). It was a win-win situation for everyone … until the Ponzi scheme it was all built on ran out of money.
Sorry for the potentially off-topic rant, but it is really disingenuous for anyone to claim that any particular political party is off the hook for the financial fiasco we’re now in.
Look, does anyone seriously believe that we can rely on the Congress, regardless of which party is in power, to cede necessary power to civil servants and/or pragmatic federal agencies in order to properly regulate the mortage and finacial industries? If you do, I wish I shared your optimism. But I’m not holding my breath.
March 11th, 2009 at 12:50 pm
I’m not quite sure what is meant by a “Product Safety Commission” for consumer loans. With a pill or a toy, you don’t quite know what’s inside or what the long-term effects will be. With a mortgage, it’s just a contract on a piece of paper. You can read the terms and figure it out.
Maybe a law that mandates full disclosure, plain english, explanation of your payment obligations in tabular and graphical format… would be good. And maybe lenders should provide a CD-ROM with a spreadsheet that allows you to toggle the interest rate (if adjustable) to see how parameters will change.
Note: Elizabeth Warren was my professor at Harvard Law. She’s a good teacher, though I thought some of her scholarship (particularly the article that purports to show that 50% of personal bankruptcies are caused by medical problems) was a bit empirically non-rigorous.
March 11th, 2009 at 1:27 pm
Call it the Internal Finance Service, and model it on the IRS.
It is better to be feared than loved.
March 11th, 2009 at 1:27 pm
This is why getting Rodge Cohen, the managing partner at Sullivan & Cromwell and probably the top banking regulatory lawyer in the country, as a treasury appointee is such a big deal. Let’s hope he gets confirmed.
March 11th, 2009 at 1:40 pm
Shorter Matt: “Let a hundred Greenspans bloom.” (a) that wouldn’t make the difference that Matt thinks, (b) that can’t happen in the real world, and (c) that’s a good thing, because this is a really bad idea.
March 11th, 2009 at 5:01 pm
It appears to me that this issue is being framed as if our regulatory system never really worked. Does the future really need to be substantially different from the past?
March 11th, 2009 at 7:27 pm
In fact goes much deeper than just rich people making sure their preferences are met. Do you really think any advocate for the poor would have stood idly by if a real push to limit sub-prime mortgages had been initiated in, say, 2004? Who do you think wouldn’t have gotten homes? Not to mention the racial disproporationate impact of such a move.
I have been told on good authority that that last part simply cannot be true. Attempts to be “anti-racist” could not possibly have had anything to do with not trying to stop the bubble. At least that’s what almost everyone commenting on this blog says.
March 12th, 2009 at 12:03 pm
in the face of the sort of deliberate, systematic dereliction we have seen over the past 8 years, i regret to say, i don’t think any of Yglesias’s ideas would have much value.
assume the same party gets control of the White House and the Senate, assume that party pursues “deregulation” blind idology, for whatever reason (and without regard for the public interest or even simple reality)… then between political appointments and the refusal to engage in any congressional oversight, it would not matter how capable, or respected, or relevant our regulatory institutions were. they would become marginalized and ineffective, basically overnight. federal oversight of corporate conduct (of any kind) would simply stop until the political landscape changed.
been there, done that.
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