Comments On The Proposed Financial Regulatory "Reforms"

The current administration's blueprint for extensive financial regulatory "reform" was recently released. It's instructive to note the assumptions which must underlie its format.

Specifically, I refer to two aspects of the changes. First, it provides vast new regulatory powers to two federal institutions- the Federal Reserve and the FDIC- which utterly failed to prevent the recent mortgage-related financial collapses of both firms and the entire US financial system.

Second, it calls for a super-regulator to oversee systemic issues and be the locus of ultimate regulatory authority.

It doesn't take a genius to realize how badly flawed these assumptions are.

In the real world, why would you give more power to an institution that just failed at its existing mandate with its current personnel? Rational people would investigate why the organization failed. Was it staff, training, processes, procedures, leadership, or something else?

Was that 'something else' perhaps an outside authority or player? Perhaps named 'Congress?'

Whatever the cause, it has to be discovered, and a specific remedy suggested to reform the existing regulatory body.

Regarding the hope that a single super-cop on the financial beat will somehow permanently eliminate all future financial disasters, it's a pretty naive one.

Only this morning, a former FDIC chairman laughed at the idea, noting that competing regulatory agencies are more likely to discover problems than a single, unchallenged one.

I'd go further. There is, or ought to be, already, between the Fed, FDIC, OTC and other agencies, sufficient information on US financial institutions to provide other, perhaps new regulatory authorities with data to observe and analyze.

Just because the Fed collects bank data does not mean you want to fuzz up and confuse its mission and focus. Only naive and inexperienced systems designers would equate collecting data with necessarily using it as a regulator.

Why not consider, socialize and then organize generally-agreed regulatory panels or organizations which use data from the existing institutions, but each take a particular perspective on oversight, e.g., institutional risk, leverage, counterparty risk, systemic risk, etc.

Ideally, the Fed should focus on managing the nation's money supply. The FDIC should focus on quickly closing ailing banks.

The information the two existing institutions collect could be used by other, new, when necessary, purpose-driven regulators who could then apply specific tools to the data already collected. This would avoid needless blurring of institutional focii, overburdening of staff, and preserve a diversified, multiplicity of observers of various financial system risks and potential problems.

But it's highly unlikely that anything as simple and blunt as just anointing one agency as super-regulator will solve anything. Or prevent a repeat, in a different area, of the mortgage finance-sourced financial problems of recent years.