A few days back, Treasury Secretary Paulson unveiled a new blueprint for reforming the way we regulate financial services. Clive Crook has had a chance to look it over in some detail, and he's not particularly impressed:
The new Treasury blueprint for reforming financial regulation is not really a blueprint at all.... It says some sensible things and has some good ideas, but for the most part it is an agenda for discussion rather than a detailed plan. Given that the Treasury has been working on this thing at least since March 2007, it is surprisingly thin.
Crook essentially echoes an argument made earlier by Paul Krugman: although the plan sounds good in parts, its mostly just an exercise in bureaucratic reorganization. Krugman calls it the Dilbert strategy, and sadly I think he is right.
Despite more than a year's worth of prep work, the plan is filled with nothing more than vague statements of goals and ideals. But where is the actual policy? The plan is page after page of vague generality, with little or no discussion about how various goals are to be measured or by what mechanisms they are to be accomplished. This is the best they could do?
And as Crook points out, even in the generalities there are sometimes serious problems. Take as just one example the idea that regulation might extend beyond firms with "explicit government guarantees." If we learned anything from the Bear Stearns debacle, it is that the list of firms "too big to fail" are far larger than most might have previously thought. I'll let Crook take the response:
It seems to me obvious that prudential regulation ought to extend beyond firms with "explicit government guarantees". At the very least, delete "explicit". We are witnessing right now how the collapse of firms without explicit guarantees may nonetheless pose a threat to the integrity of the whole financial system. Evidently, it is a threat that the Fed and the Treasury have recognized--and that is why the umbrella of implicit guarantees continues to expand. There must be a regulatory quid pro quo for that, just as for the explicit kind.
This really is quite simple. If you are too big to fail, you are also too big to go unregulated. Or to put it another way, if we are going to socialize the losses when you eventually fail, we have both a right and an obligation to regulate you in ways that will make that failure less likely.
The rescue of Bear Stearns, in particular, was a paradigm-changing event.
Traditional, deposit-taking banks have been regulated since the 1930s, because the experience of the Great Depression showed how bank failures can threaten the whole economy. Supposedly, however, "non-depository" institutions like Bear didn't have to be regulated, because "market discipline" would ensure that they were run responsibly.When push came to shove, however, the Federal Reserve didn't dare let market discipline run its course. Instead, it rushed to Bear's rescue, risking billions of taxpayer dollars, because it feared that the collapse of a major financial institution would endanger the financial system as a whole.
And if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks, the implication seems obvious: they should be regulated like banks, too.
The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as "promoting a competitive financial services sector leading the world and supporting continued economic innovation." That's banker-speak for getting rid of regulations that annoy big financial operators.
To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology -- and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake.
Thus, in a draft of a speech to be delivered on Monday, Henry Paulson, the Treasury secretary, declares, "I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil."
And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees -- that is, institutions that are already regulated, and have not been the source of today's problems. As for the rest, it blithely declares that "market discipline is the most effective tool to limit systemic risk."
The administration, then, has learned nothing from the current crisis. Yet it needs, as a political matter, to pretend to be doing something.
So the Treasury has, with great fanfare, announced -- you know what's coming -- its support for a rearrangement of the boxes on the org chart. OCC, OTS, and CFTC are out; PFRA and CBRA are in. Whatever.
Will rearranging these boxes make any difference? I've been disappointed to see some news outlets report as fact the administration's cover story -- the claim that lack of coordination among regulatory agencies was an important factor in our current problems.
The truth is that that's not at all what happened. The various regulators actually did quite well at acting in a coordinated fashion. Unfortunately, they coordinated in the wrong direction.
For example, there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations. The occasion symbolized the shared determination of Bush appointees to suspend adult supervision just as the financial industry was starting to run wild.
Oh, and the Bush administration actively blocked state governments when they tried to protect families against predatory lending.
So, will the administration's plan succeed? I'm not asking whether it will succeed in preventing future financial crises -- that's not its purpose. The question, instead, is whether it will succeed in confusing the issue sufficiently to stand in the way of real reform.
Let's hope not.
Given Krugman's unique ability to turn complex financial problems into easy to understand narratives, let's hope he stays on top of this one over the coming weeks and months.
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