Scary News of the Fed's Regulatory Snafus in the WSJ

Yesterday's Wall Street Journal carried an extensive article reporting on internal Fed bickering and regulatory oversight errors stretching back to the Greenspan era. It's a troubling, scary and cautionary tale for those who believe that regulatory Nirvana for the US financial sector consists of simply giving any one regulator, especially the Fed, omnipotent and sole power for this task.

Or, perhaps, any believing that regulation will really cure future systemic ills.

In any event, we learn that Greenspan claims he punted on regulatory matters to his colleagues. Does this inspire confidence in a Fed-only regulatory scheme? What if another Fed chairman eschews much interest in this function, and there's nobody at FDIC or OCC to provide any sort of complementary coverage?

Then we have Helicopter Ben issuing bone-chilling warnings to Congress, saying it would be a "grave mistake" to 'dilute' its regulatory and supervisory role. Nevermind that they had sufficient powers before and during the recent meltdown, and failed to prevent it.

Then we have Tim Geithner, when NY Fed chief, fighting for regulatory power, and dragging his weaker fellow regional Fed Bank presidents behind him for cover. Of course, those presidents had a lot to gain by allying with Geithner back then.

Now, of course, safely ensconced at Treasury, Geithner is mum about the issue.

Here's a thought. Rather than be entertained by news of fights between the Fed Banks and their Washington colleagues, or the Fed and other regulatory agencies, why not dream of a 'best practices' approach?

Surely our multiple financial sector regulatory agencies have more than sufficient data with which to supply objective, academics for in-depth research into what factors pre-figured bank failures, and what the corresponding ratings by various regulators were along the way.

I'm put in mind here of something analogous to NYU's Ed Altmann's pioneering and still-outstanding work on the factors predicting bond defaults.

Why are we forced to watch, and, through Congress, choose among qualitatively-determined regulatory schemes and standards, when the best approach should, and could be, objectively and quantitatively determined?

That, to me, is the scariest aspect of this topic. There should be no qualitative wiggle room on this issue. Collectively, our regulators have the descriptive data and outcomes, in sufficient volume, to identify statistically significant predictors of bank failure, along with time paths to that failure.

Why is developing and implementing a regulatory solution along those lines so hard?

Probably because a lot of rice bowls are at stake among our government regulatory entities. Salaries to be lost, careers truncated, children's' educations to be paid for by another line of work, less-lush pensions from other employers, as the mystery and duplication of this activity is drained, and fewer, more objectively focused regulators engage in less expensive, more timely and effective regulation of our nation's banks.