The New Regulatory Era
The Obama administration seems to have decided against any major push for regulatory consolidation. Instead, it looks like the Office of Thrift Supervision will be closed but a new regulatory agency will come into being charged with doing basically a “consumer protection” function, as per Elizabeth Warren’s idea. Instead, the big change is going to be create a “council” of regulators, loosely overseen by the Fed, and charged with regulating overall leverage. Presumably the idea is to achieve the core purpose behind regulatory consolidation—someone can watch the big picture—without getting into the messy fights with congressional committees.
One concern here, I would think, would be that this seems like one of several measures taken over the past 12 months that’s likely to reduce the Fed’s independence. The other is that while I don’t think the idea of totally consolidating all regulators into a single shop is truly necessary, the total absence of any consolidation whatsoever is somewhat jarring. We have an enormous number of federal and state financial regulators, and the ability to forum shop simply makes it difficult to do the job right. It’s hard to create one or two agencies that too their jobs really well; it’s going to be very difficult to make sure that nobody’s falling short and creating a crack everything can slip through.
But beyond reading about the broad outlines of the proposal, it’s hard to get a sense of some key factors. Part of the appeal of putting the Fed in charge is that people generally have a good vibe about the Fed. People think the Fed knows what it’s doing. Really smart people want to go work there. Becoming top dog at the Fed is considered a major career ambitions for very ambitious people. Doing a stint there at a low-level is great for your career. When Ben Bernanke talks, people listen. It was the same with Alan Greenspan. And it was the same with Paul Volcker. It’s hard for a lone company or a lone Senator to intimidate the Fed. It’s a big league federal agency, in other words, like the Navy or the FBI; people don’t take it lightly.
I think a big part of the question we’re faced with doesn’t relate to changing the bureaucratic diagrams around, it relates to making more of the regulatory agencies Fed-like in terms of having good people, a good reputation, and a good amount of prestige and self-confidence. The rules are only going to work as well as the institutions charged with implementing them.
18 Responses to “The New Regulatory Era”
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June 15th, 2009 at 11:40 am
Would you please make the second and third sentences make sense? Honestly I don’t know why I read this blog. Masochism is the only explanation.
June 15th, 2009 at 11:43 am
The other is that while I don’t think the idea of totally consolidating all regulators into a single shop is truly necessary, the total absence of any consolidation whatsoever is somewhat jarring.
This “total absence of any consolidation whatsoever” claim by Matt is puzzling to me. Although the total number of agencies wouldn’t be changed (with a new consumer protection agency replacing the OTS), it appears various regulatory functions would in fact be consolidated in the Fed and this “council of regulators”. Indeed, it appears this would include the two most important functions (at least with regard to “large” firms): setting capital, liquidity, and leverage requirements, and the authority to initiate the orderly unwinding of failing firms.
The rules are only going to work as well as the institutions charged with implementing them.
And the institutions will only work as well as the rules (laws and regulations) they have to enforce. So you need to get both right.
June 15th, 2009 at 12:01 pm
You act like the Fed hasn’t been a huge bank regulator. It has, its one of its functions.
June 15th, 2009 at 12:11 pm
The problem with Elizabeth Warren’s proposals, really, is that after reading through her stuff, I get the sense that a lot of what she wants to be happening aren’t so much motivated by saving the economy as by advancing her own socio-political agenda, which is turning American society back to the New Deal consensus.
She’s got an agenda to push, and so you gotta watch where all these ideas are coming from. They aren’t impartial, and so we aren’t bound to treat them impartially. Frankly, someone more neutral in socio-political questions should have been appointed, but since the horses have bolted, too late.
June 15th, 2009 at 12:11 pm
Hehe, “reduce” the Fed’s “independence”, hehehe!
Good one!
June 15th, 2009 at 12:15 pm
Oh, and Myles above is even funnier. Return American to that damned “New Deal Consensus”. Which, of course, America never left in the first place. And when you have a situation where you’re teetering at the edge of a possible depression, with unemployment high and further on the rise, of course the best advice would be to not pay any attention at all to what worked in the New Deal! Yes, brilliant in its simplicity, this idea.
Americans sure hate Social Security and Medicare, they sure hated all that job creation, and the like. If ONLY we could get rid of this DAMN social safety net!!! Then we’d really be cooking with gas here…
June 15th, 2009 at 12:28 pm
The plan stops short of the complete consolidation of power that some lawmakers have advocated. … It also won’t place specific limits on the size or scope of financial institutions, but it will make it much harder for large companies to be so overleveraged that they threaten the broader economy.
Fail, fail, fail, fail, fail. If we allow institutions to get big enough and stay big enough to create systemic risk, eventually they will fail and have to be bailed out, no matter how highly regulated they are. Fail.
June 15th, 2009 at 12:28 pm
People did have a good vibe about the Fed. Especially the elites because since around 1991 the Fed made it its mission to inflate assets and defend that inflation by calling it growth.
Some people still do have a good vibe about the Fed because they understand intuitively that only the Fed can restore that sort of growth again that requires no work. Well they think the Fed can do that again but those days are over. The era of growth is over. They have a good vibe about the Fed because they need a big Daddy to believe in. Big Daddy will save us. He just has to.
June 15th, 2009 at 12:38 pm
We doreally need to reduce the feds independence. There should be no institutions of the government that are as anti-democratic as the fed is.
Matt is nothing but a tool of the status quo. He is too weak to formulate his own opinions, and listens to whatever washington tells him.
Really, you basically have to be insane to believe that the fed should be as independent as it is and to cast anything that reduces it’s anti-democratic nature as dangerous. Whjats dangerous is having an uncountable faction of the US government.
June 15th, 2009 at 12:40 pm
I’ve been re-reading William Greider’s “Secrets of the Temple”. Frightening. The more things change, the more they stay the same.
As a regulatory agency, the Fed was captured by the large commercial banks long ago. Setting up the Fed as primary bank regulator will mean very little regulation, de facto insurance of large institutions at taxpayer expense, and a financial crisis every ten years.
June 15th, 2009 at 12:57 pm
I gotta agree with onceler: Myles is indeed funny.
Someone who’s neutral on socio-political questions? Right, let’s just find one of those. OK, people, everyone who’s neutral on socio-political questions, please raise your hands. Keep ‘em up. Anyone?
Myles, did it ever occur to you that YOU are not neutral on socio-political questions – that you are, in fact, sort of a Tory market fundamentalists – and that YOUR political leanings, far more than Warren’s, explain why her ideas are the reason you “…get the sense that a lot of what she wants to be happening aren’t so much motivated by saving the economy as by advancing her own socio-political agenda?”
June 15th, 2009 at 12:58 pm
“People think the Fed knows what it’s doing.”
Not people who have done their homework.
June 15th, 2009 at 1:00 pm
If we allow institutions to get big enough and stay big enough to create systemic risk, eventually they will fail and have to be bailed out, no matter how highly regulated they are.
As I have suggested before when this has come up, you don’t need big institutions to have systemic risk, precisely because systemic risk can arise in a system of smaller firms. And this isn’t just a theoretical point: the Savings and Loan crisis was a systemic problem that occurred among relatively small firms, and other banking crises in the past have also happened from the bottom up, as opposed to the top down. Conversely, as we have also discussed here before, Canada’s banking system is much more highly concentrated than ours, but it has done relatively well in the current crisis (thanks to much stricter regulation, including with respect to capital requirements).
Accordingly, the size of institutions is at most a secondary concern (secondary to the strictness of the regulations), and arguably there is no clear reason to favor smaller institutions at all.
June 15th, 2009 at 1:22 pm
Some comments re: the Fed from John K. Galbrath in 1975:
The perverse unusefulness of monetary policy and the frustrations and danger from relying on it…This is perhaps the clearest lesson of the recent past. The management of money is no longer a policy but an occupation. Though it rewards those so occupied, its record of achievement in this century has been patently disastrous. It worsened both the boom and the depression after WWI. It facilitated the great bull market of the 1920s. It failed as an instrument for expanding the economy during the Great Depression. When it was relegated to a minor role during WWII and the good years thereafter, economic performance was, by common consent, much better. Its revival as a major instrument of economic management in the late ’60s and early ’70s served to combine massive inflation with serious recession. And it operated with discriminatory and punishing effect against, not surprisingly, those industries that depend on borrowed money, of which housing is the leading case. To argue that it was a success may well be beyond even the considerable skills of its defenders. Only the enemies of capitalism will hope that, in the future, this small, perverse and unpredictable lever will be a major instrument in economic management.
June 15th, 2009 at 1:53 pm
The Geithner Summers op ed is a disaster. Particularly disheartening is the decision not to crush the peer to peer system, which was the mechanism by which the shadow banking system grew into the world’s greatest fiction, but to “regulate” it. Regulation would only be possible if a market institution, like the stock market, were created, and all transactions were made transparently witnin it. Even Scholes said this.
Summers is like the Manchurian candidate from Wall Street. It is amazing that, with his record, he has such power. He’s like Obama’s Rumsfeld and Cheney in one.
June 15th, 2009 at 2:23 pm
[...] UPDATE: On the larger plan itself, Matt Y [...]
June 15th, 2009 at 2:31 pm
[...] has already been plenty of reaction to the piece, but I’ll turn it over to Simon Johnson, who takes on Geithner and [...]
June 15th, 2009 at 3:34 pm
Myles, did it ever occur to you that YOU are not neutral on socio-political questions – that you are, in fact, sort of a Tory market fundamentalists
I did not put my name forward as candidate, but Elizabeth Warren, who is just as biased, albeit in a differing direction, did, and thus her bias needs to be recognised, examined, and applied against her opinions, and she is, after all, supposed to be unbiased when she in fact is not.
Sorely wanting to go back, out of warm fuzzy nostalgia, to status quo ante Reaganum Clintonumque is not a justification for bias.