The Real Danger of "One Big Regulator"

Financial regulation is the next item on the political horizon, and it doesn't have to be the deathly dull wonk-battle that it sounds like. In fact, if the Democrats do their job, it can just as easily become a platform for addressing the greatest issues of them all.

Our current way of regulating the financial system is dysfunctional. Oversight is dispersed among numerous confusing bodies that at times have seemed to be racing each other to the bottom. Setting up One Big Regulator would end that problem.

The Obama administration's plan is to have the Federal Reserve regulate banks that might pose a "systemic risk" if they were to fail. Critics suggest the Fed is too close to the banks that it would be charged with cracking down on. What's more, the Fed's main task is monetary policy, so regulating banks would never receive the attention it deserves.

Let me add another objection: What if some future administration were to install as the chairman of the Federal Reserve--or as chief of whatever agency is made into the One Big Regulator--a man who really doesn't believe in the regulatory mission? What if control of the systemic regulator is handed over to a person who considers 19th-century economic arrangements to be a sort of aspirational ideal? A man who turns out to be a dedicated fan of Ayn Rand, that Nietzsche of the boardroom? A man who blows off warning signs because, in his perfect theoretical universe of rational markets, the only really systemic problem is government itself?

I raise this potential problem because, from 1987 to 2006, that's pretty much the sort of man who headed the Federal Reserve. Had Alan Greenspan somehow been handed the One Big Regulator job back in those days, we might have had no real financial regulation in this country at all.

Consider the astonishing ideas about fraud that Mr. Greenspan once reportedly expressed. According to a Washington Post interview earlier this year with Brooksley Born, the former head of the Commodity Futures Trading Commission, in 1996 Mr. Greenspan "explained [to her] there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him." Later on, Ms. Born proposed that the U.S. regulate certain financial derivatives; Mr. Greenspan was influential in stopping her.

Could a Fed chairman do otherwise? As economist James K. Galbraith has pointed out, they are usually chosen "from among people who are close to the banking industry and to the financial sector." They can hardly be expected to be enthusiastic regulators of the same.

As Fed chairman, Mr. Greenspan also worked to head off regulation of hedge funds. He waged war against the Glass-Steagall Act. A 2004 Wall Street Journal profile of Mr. Greenspan, subtitled "The Deregulator," described his Fed's fondness for bank mergers and then included this critical passage: "Critics say these mergers concentrate financial risk too heavily in a few institutions. Mr. Greenspan argues that deregulation also produced a more stable financial system."

Did the nation ever rise up to tell The Deregulator to get with the program? No. Our consensus opinion leaders virtually worshiped the man. In 1999, he made the cover of Time magazine as part of a "Committee to Save the World." His biography, a classic of Washington-style power-palaver, was written by Bob Woodward, who dubbed Greenspan the "Maestro."

Why rehash this embarrassing stuff? Because judgment day for this particular form of wrongness has never really come. Yes, Mr. Greenspan himself has changed his ways: He uttered a famous mea culpa in October 2008, at the very pit of the crisis; of late he has even seemed to call for some kind of breakup of the "too big to fail" institutions.

Out in the consensus world that made a god of Mr. Greenspan, though, the deregulatory faith has never really been challenged. And until it is--until the bad ideas themselves are confronted--the best-designed regulatory institution in the world will go awry. It will merely become a fat target for the next bunch of "market based" politicians to come down the pike.

Taking on the consensus ideas of the past few decades is not a task for a happy bipartisan administration. It is not something that can be done by triangulation. What's more, it will require Democrats to align themselves openly with government, a posture they are loath to strike in these cynical days.

On the other hand, President Barack Obama has often spoken about a politics that transcends the culture wars, and this issue might just be the way to start building a new coalition around economic issues. Besides, the Republican leadership has made it easy for him, betting everything on the absurd notion that more government automatically equals less freedom. With a little skill, the boring issue of financial regulation could become their Waterloo.

Read other OpinionJournal articles:
Janet Trautwein: Why We Need a Strong Individual Mandate
Morris Davis: Justice and Guantanamo Bay

 

Comments

[unitron]

"...if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

And Greenspan knew that this was true because Bernie Madoff assured him that it was so.

[Texas Aggie]

I agree with the main thesis of the article, which by the way, is relatively obvious. We always need someone to watch the watchers. So if having one regulatory agency won't work if the head is someone like Greenspan, what are the solutions to the problem? Having several agencies like we do now is even worse because the banks structure themselves to be covered by the most lenient agency. What would anyone propose? Do we have a single agency with someone else not the administration or the Congress picking the head? Do we make a requirement that the person have be a prosecutor? What do we do?

[thnk4selfagain]

The FED being the systemic regulator is a non-starter. The Admin (and Geithner) is so out of touch, that they did not realize the skepticism and antipathy the Fed has engendered by its failures to regulate before the collapse.

I agree with Paul Volcker: the TBTFs are not entities that can be regulated with a single or group regulatory apparatus (regulatory arbitrage and general systemic corruption). Break up the TBTFs or we will have another crisis. This country is still on its knees, there is *not* a recovery.

[demockracy]

Given that our current regulators are captives of the institutions they regulate, the whole question of regulation is problematic.

The other problem is the amount of attention given to misdirection. For the last three decades the U.S. economy has experienced real productivity gains, which would mean real incomes should increase. What happened, however, since we have been in the thrall of Reaganomics, is that the bottom 90% of real incomes declined, those at the 90th percentile received roughly a 1% per year raise, and those at the 99.99th percentile had a 497% raise (the real numbers per Paul Krugman here: http://select.nytimes.com/2006/02/27/opinion/27krugman.html)

But the line we hear 24/7 from the right wing noise machine is that we need even less regulation, and even lower taxes on the wealthy. The gay, married Hispanic terrorists are the real problem...

[sonofsamphm1c]

I worry about many of these same things, but having several regulators did not fix GreenRANDscam's reluctance to regulate.

GreenRANDscam was a major cause of the credit crisis, but not simply because he refused to obey a directive from congress to regulate. Congress gave him an optional authority to regulate subprime, and he opted to let it collect dust in his drawer. Where he was ordered to regulate, he halfheartedly regulated.

[patbernstein]

Alan Greenspan might have claimed to be influenced by rand, but he wasn*t. For one thing, the very idea of a central bank artificially fixing interest rates, is the exact opposite of free markets.
Also a central bank is by definition central planning, and an example of command economics.

The federal reserve should be abolished, not given more power.
It is a violation of U.S. Constitution -

Article I, Section 8, Clause 5. The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

[henryberry]

With principles of transparency and accountability, the question of regulation is simplified. It almost takes care of itself. There not so much need to regulate businesses (or individuals) who are transparent--i. e., open--and accountable. These principles (virtues maybe) instill a sense of responsibility.

Moreover, they are not political--but personal or community--values and practices. I guess this is why they have such a tough time taking root in Congress or larger businesses. I thought these were prime values for Obama. You'd have thought so to hear him talk in his campaign. But as we see with his pageantry of decision-making regarding Afghanistan (four--FOUR--options so far), he really doesn't have much of an idea of what he thinks on anything and engages in balletic displays (many comment on his "grace" while doing this) which spread responsibility throughout the bureaucracy and thus remove it from himself.

The same goes for miscreant corporations, criminal gangs, big corporations, large law firms, etc. The layers and layers are to disguise and hide, not for well-meaning or efficient operations. I once heard the expression the "majesty of simplicity" (from an old-time corporate executive describing a certain corporation). I think you know what it means. There's not much majesty around these days; except deliberate caricatures of it from the obnoxious like of the Goldman chief who says he's doing "god's work".

[DrPaulProteus]

"Because judgment day for this particular form of wrongness has never really come."

You know, it's before coffee for me, but given that this article starts off with a reference to regulation, which means laws coming from Congress, i read "wrongness" there as "Wrongress".

Have I come up with a new term?

Great article as usual, Mr. Frank. Why don't you have your own TV or radio show somewhere?