We’ve had TARP for banks, TARP for auto companies, and now, with the Obama Administration’s plan for financial regulatory reform, we have TARP for regulators. After AIG, Citigroup, Bank of America, and General Motors, the administration has decided that all the existing regulators are Too Big to Fail – except for the Office of Thrift Supervision, which must play the role of poor Lehman Brothers in this saga. (Actually, they are more like Merrill Lynch, since they are getting merged into the new National Bank Supervisor, so most of them will probably keep their jobs.)
There is actually a serious issue here, and one with no obvious solution. One question that has gotten a lot of ink, both before and after the unveiling of the plan yesterday, has been the identity of the systemic risk regulator: new agency? council of agencies? the Fed? What this really shows is that it’s easier for the media, the administration, and Congress to focus on the how the agency acronyms will be reshuffled, which is a bit like covering a sporting event, than on the underlying issues, like how to make those agencies more effective.
(Warning: I’m about to argue three sides of an issue.)
(1) So, for example, it’s a little ridiculous that the Federal Reserve is being given the role of systemic risk regulator, since the Fed (under Greenspan, but with no dissent from Bernanke) completely missed the housing bubble, the risks of a massive derivatives market, and the systemic implications of toxic mortgages that it was actually supposed to be regulating – and, in fact, contributed to the financial crisis by keeping interest rates low for the first half of this decade, and then helped aggravate it by letting Lehman fail. Yes, I know, most economists didn’t predict the crisis, either, but no one is nominating them for systemic risk regulator.
(2) But what’s the alternative? You could posit a new regulatory agency focused on systemic risk; let’s call it Bill. But you have no right to simply assert that Bill will do any better than the Fed. In fact, since Bill will start out with no building, no computers, and no staff, you could argue that the Fed, after being given an appropriate pep talk, would do better than Bill. It’s likely that many of the people working for Bill would be people who used to work for the Fed. Planet Money had a story a while back (I think it’s in this episode) about how when the Federal Home Loan Bank Board was abolished in the wake of the savings and loan crisis, its employees just kept on working and eventually the sign on the building was changed to Office of Thrift Supervision.
So given those alternatives, it’s easy for someone as smart as Larry Summers to argue that the Fed is a better choice than a new agency, or a committee, as he did on All Things Considered today. Basically he is positing an ideal Fed – one with the technical skills it has today (according to Summers) but not the huge blind spots it had in the past. I can posit an ideal Bill, but it won’t be any better than his ideal Fed.
(3) The real issue behind this reshuffling of agencies and responsibilities is how you can get better regulators – people with the skills, motivation, and stomach to stand up to both banks and politicians who are screaming at them to get out of the way of progress and prosperity. And here I don’t think the administration’s plan gives us anything.
What could it have done? Here’s one idea: it could have spun the regulatory agencies off into semi-independent bodies, so their heads aren’t replaceable at will by political figures (as is currently true of the Fed); established a long prohibition (5 years?) on making any money from the financial sector after leaving the agency; and then doubled the salaries of every single regulator. (I know there are some transition issues you would have to deal with, like getting rid of a lot of the people who were asleep at the wheel.)
That would be a step toward increasing the status of regulators and reducing the threat of regulatory capture. I’m sure there are problems with these proposals, but at least they address the real problem.
Update: Krugman:
Tellingly, the administration’s executive summary of its proposals highlights “compensation practices” as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says — “Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value” — is a description of what should happen, rather than a plan to make it happen. . . .
In short, Mr. Obama has a clear vision of what went wrong, but aside from regulating shadow banking — no small thing, to be sure — his plan basically punts on the question of how to keep it from happening all over again, pushing the hard decisions off to future regulators.
The question with this package is not if it’s well-suited to a world where regulators want to regulate. It’s if it’s well-suited to a world in which they don’t. A world in which growth is quick and greed looks good. A world in which Wall Street seems to be helping Main Street buy, if not houses, then a surprising number of wind turbines. One of the lessons of the past few years is that regulation has to be impartial and disinterested because regulators, and even Fed chairman, get swept up in the cultural manias behind asset bubbles as surely as traders do.
By James Kwak
The Baseline Scenario 
Obama-Geithner-Summers seemed to have adopted the Bush-Cheney-Rove response to calamities: “Nothing really happened here, so let’s just move on.” And, hey, it will probably work. Just like the “independent” studies of 9-11 and of our intelligence failures prior to Bush’s war on Iraq worked so well for Bush-Cheney-Rove. No one was to blame. No one lost their jobs. The chairs on the Titanic were shuffled furiously.
I think that the Fed should run everything. Let’s get back to the days when Greenspan was God and Tim Geithner was the eagle-eyed head of the Federal Reserve Bank of New York.
Brooksley Born for Systemic Risk Czar!
This is “Hamilton Project” government, based on the premise that there is no problem on earth, manmade or otherwise, that cannot be talked and talked and talked out of existence. As I wrote last week in my NY Observer col, Wall Street has basically given the rest of us the finger. We may in fact be no worse off than had McCain carried the country, but I feel a kind of disillusionment settling in, in myself and others,that over the longer term may produce a degree of cynicism that might prove ideologically fatal.
You are pissing in the wind, my friend, until you figure out how to commit Congress to real regulatory reform. It makes sense that the Administration has focused its hopes and fears on the only truly independent regulatory entity in their arsenal as the locus for improved regulation.
http://epicureandealmaker.blogspot.com/2009/06/mighty-wind.html
i continue to think that we have met the systemic risk regulator, and he is us.
Yes Mr. Thomas, I was looking for the right word for it and you found it–disillusionment. Normally I’m so enthusiastic to put a my little post here on “baseline”. I’m usually so excited to put my 2 cents in. But today, I just feel I can’t look anymore. I can’t watch these small scraps fed to us like dogs, while the bankers and Senators and House Representatives sit at the big table above us eating their feast. And the scraps we were given on June 18, this “dog” turns his nose to. I can’t eat these scraps anymore. And this on top of their failure to help the families and workers facing foreclosure, who if given a few months, or better terms would eventually own and live in those same homes, maybe for decades.
Yes “engineer27” your nomination of Brooksley Born to be “Systemic Risk Czar” is very wise. IT WILL NEVER HAPPEN. I want credit default swaps to be outlawed. IT WILL NEVER HAPPEN. I want retail banking to be separated from investment banking as we had before the repeal of Glass-Steagall. IT WILL NEVER HAPPEN. I want credit rating agencies to be paid by the people who USE their ratings, NOT by the companies that issue the instruments. IT WILL NEVER HAPPEN. I wish there was a law that firms that originate a security keep 50%+ “securitized exposure” instead of a measly 5% (keep the loans they originate on their own books and not package and sell them). IT WILL NEVER HAPPEN. I wish there was a law that required bankers to be paid with long-term stock options or warrants (so they can’t behave irresponsibly and say “so long suckers!!!”). IT WILL NEVER HAPPEN.
All of these things could be done RELATIVELY easily (with the exception of separating retail banking from investment banking, but it sure beats the heck out of bailouts). But you know…. why go to all that bother if we’re going to upset the bankers and the congressman they’ve worked so hard to bribe???? I mean who cares we have double digit employment in many states and hard working people losing there homes??? Those are small prices to pay in order that we can avoid Mr. Banker getting a frown on his face or Mr. Banker suffering acid reflux as he drinks his morning coffee.
I’m right where you are. Maybe if there were enough of us————–
That’s a nice start for a to-do list.
Would be great if Baseline has a complete list of specific recommended policy initiatives (much like the actual baseline projection).
“The real issue behind this reshuffling of agencies and responsibilities is how you can get better regulators – people with the skills, motivation, and stomach to stand up to both banks and politicians who are screaming at them to get out of the way of progress and prosperity. And here I don’t think the administration’s plan gives us anything.”
Can we really blame the (civil service) regulators for this? Is there any regulatory agency in existence that we could expect to _consistently_ stand up to the combined might of a critical Congress, the President, and the media for a long period of time?
In a democratic government, government officials ultimately do what they’re told or they get fired – if they don’t, then that’s possibly even worse. The politically appointed regulators one can blame… but, they’re politically appointed.
q’s comment is right on target – the fault is not in the regulators, or the system, it’s all of us, because we all want to have our cake and eat it, too, while blaming someone else for “causing” the crisis.
When this all began in 2007 I thought the crisis might be significant enough for significant changes in western economic culture to occur. While there are some signs that some bright people are thinking differently, the vast majority is still addicted to an unsustainable lifestyle.
Maybe next time…or maybe the west will simply decline slowly as the east rises.
What’s the difference between saying, “Oohh, it’s nobody’s fault,” and saying, “Oohh, it’s everybody’s fault”?
They’re both wrong. It is the fault of those who had the authority & responsibility to prevent it & failed, i.e. Greenspan, Bernanke, Paulson & Geithner. So how long does Obama wait before he holds them accountable? Until the Chinese, Japanese, Russians, et al quit financing Bernanke & Geithner’s stupid bailout of the stupid bankers?
Seems that Obama’s capabilities are coming into better focus for a lot of his supporters. I voted for Obama mostly because of his intelligence & apparent empathy for the average person. And he has proven to quite intelligent. He is very good at analyzing problems. His analysis of the financial crisis I think many would agree is spot on. And he makes very good speeches. A big talker no less.
But, to this point he hasn’t solved any problems, only analyzed them thoroughly.
I’m not aware of any problems that he has actually ever solved. Which ain’t good.
He hasn’t accomplished much of anything for the average person. He’s taken good care of some bankers & other various & sundry fat cats.
Also, his inability to pick good people is a concern. He now has chosen Mr.’s Geithner, Summers, Holder & Ms Sotomayor for high post. All seem to be big talkers but not really doers or problem solvers. None have apparently really ever accomplished anything meaningful, besides getting a good education. Which in & of itself doesn’t solve any big problems. And we’ve got some BIG problems somebody needs to solve. These people are all more like the Rev. Wright, Obama’s choice to be his pastor for 20 years or so. Also, a pretty pathetic choice. Big talker but not much else.
What does this all add up to? It’s just hit me that we could be in deep doo-doo for the next 4 years with Obama.