“Washington and the Regulators Are There To Serve the Banks”

By James Kwak

It is too obvious to bear saying, but I’ll say it anyway.

At the urging of the administration, Congress passed a financial reform bill this past summer that expanded the theoretical powers of regulators, but also gave those regulators the power to write the rules implementing the bill and then to enforce the rules. The bill’s sponsors fended off efforts to write specific constraints, whether size limits or leverage limits, into the statute. Yet the bill did nothing that I am aware of to ensure that regulators do a better job than they did last time around, unless you count the creation of a standalone consumer protection agency. (Yes, this is a hard problem with no easy solutions, but ignoring it doesn’t make it go away.)

Now we will see the results. Via Mark Thoma, Andrew Leonard provides the money quote, from incoming House Financial Services Committee chair Spencer Bachus: “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

Of course, having written a book that argued that politics is more important than economics, this doesn’t surprise me. Nor does the decision by the Financial Crisis Inquiry Commission’s Republican appointees to deny that the shadow banking system even exists, or to write a dissenting “primer” whose only possible motivation can be captured in Barry Ritholtz’s post, “Repeat a Lie Enough Times . . .” But what frustrated me about the administration’s position over the spring and summer was the idea that, despite this basic fact, they marched forward as if government regulation is a purely technocratic problem that can be solved by simply finding smart men and women of integrity and conscientiousness.

8 thoughts on ““Washington and the Regulators Are There To Serve the Banks”

  1. And the IMF exists to “bail out” gov’ts that “bail out” banks and bankers so they can continue the idea that all new medium of exchange should be debt at the expense of the lower and middle class?

  2. No matter how you look at it, financial regulation (like most regulation) in the US is a mess, that does not get better by tinkering. But incumbent industry participants, who are the natural beneficiaries of regulation (as per Stigler) have informal property rights, which they will defend whenever necessary. Two positive observations: (1) good to see the financial services industry getting out of its usual soft touch approach and do some hard ball political work (2) good to see that the US is still very democratic and not governed by unselfish technocrats. In the latter case regulation would be functional and relatively efficient. In true democracy regulations are shaped in contests and the result shows it. Who would drive a car designed by a bipartisan committee or by congressmen? Freedom has its price…

  3. I keep hearing the phrase “smart regulation.” Is this code for sitting one one’s hands. Methinks it is. We haven’t heard word one in the mainstream press about further financial regulatory efforts based on the big bill. I doubt that we will hear anything. Why? Because there’s nothing to hear. After all, it has been proven beyond a doubt that Washington is now under the ownership of the nations largest banks. Just let some spurious regulator decide that he knows better, and watch him be moved to a small island or Guantanamo.

  4. So when will you write the first draft of the bill that will require the break up of the TBTF banks? Who will sponsor it?

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