If you’ve wondered why I haven’t commented much about financial regulation reform, wonder no more. The reason I haven’t posted on the subject is that I don’t know much about it and, honestly, I don’t have much of an opinion.
I think the people who are pressing for reform haven’t done a particularly good job of pointing to a “smoking gun”, some regulatory power which, if they’d had it, the financial regulators could have prevented the near-meltdown of the financial system which to my eyes still seems to be ongoing. Conversely, those who are skeptical of financial regulation reform have done a pretty good job of debunking the notion that lack of power on the part of regulators rather than lack of courage or inclination.
I found the fraud complaint against Goldman Sachs interesting. It isn’t called “Government Sachs” for nothing. Former Treasury Secretaries Henry Paulson and Robert Rubin are both GS alumni. So is former New Jersey governor and senator Jon Corzine. The list of GS employees who go on to careers in politics (and, sometimes, back again) is mammoth and implicates both major political parties.
To my mind what is needed is regulator reform rather than regulatory reform and, as I’ve noted before, to do that effectively we’ll need to align incentives with responsibilities.
Little I’ve seen in the descriptions in the popular press of financial regulation reform points in that direction and it certainly appears to me to be targeted at fighting the last war which will, handily, leave the purveyors of weapons of mass economic destruction free to start the next one.
The bill in the works has some weak spots, but there are some ideas in it I would like. They are working towards giving the tools to the FDIC to be able to resolve failing banks. Even if we had wanted to let all of those banks fail, we had never gone through a bankruptcy proceeding with any corporation that large. Prior to Lehman, the largest was Worldcom at about $100 billion and we had done a few in the 30-50 billion range. No one has ever done a bankruptcy of an international bank the size of Citi or BoA. Lehman was in the neighborhood of $600 billion IIRC, and it caused quite a mess for all of us. Lehman is still being worked on.
The FDIC is used to handling derivatives and banks. It was able to quickly resolve WAMU.
http://www.fdic.gov/news/letters/rebuttal_04072010.html
I would prefer firm capital ratios rather than rely upon regulator judgment, though Waldman has pointed out that it is pretty hard to determine exactly what and how much banks hold. I still favor reducing their size, but I dont think this is really on the table right now.
While I am sympathetic to the idea of altering the regulators, I think it less likely we can do this in our current political environment. Incentivize means pay. If you are going to offer pay or bonuses competitive with the finance industry, the money will have to be generous. Then you get bloggers writing about all of those government employees making more than $100,000 a year.
Steve