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.