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One regulator to rule financial system
Robert Reich
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Kai Ryssdal: Barney Frank said yesterday he wants new regulations for the finance industry out of his committee by the end of July. Frank gets to decide these kinds of things because he's the chairman of the House Financial Services Committee. The White House, meanwhile, is working on its own version of the new rules. They could be sent up to Capitol Hill as early as next week. Commentator Robert Reich offers his recommendation.
ROBERT REICH: America got into its current financial mess partly because big banks and other financial companies did regulatory arbitrage. They gamed the system to find the most lenient regulator, and invented derivatives no one regulated, such as "collateralized debt instruments," which have so far cost you and me and other taxpayers $170 billion.
What's needed is a single, overarching regulator to replace the current patchwork that now includes the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Securities and Exchange Commission, Commodity Futures Trading Commission, state banking regulators, and a myriad of state insurance authorities.
The only public institution with enough prestige and power to do the job is the Federal Reserve, America's central bank.
Yet the Fed has one big problem. Much of the Fed's supervisory work is done by its regional banks. And who chooses those regional Fed presidents? Bankers.
Foxes guarding hen houses. Earlier this month, Stephen Friedman, chair of the Federal Reserve Bank of New York, stepped down after questions about potential conflicts because he was also a director of Goldman Sachs.
If the Fed is going to be the nation's financial overseer in chief, it can no longer be an old boys club of bankers. That means more public accountability. Yet, if it's going to continue to be America's central bank it's also got to stay independent of partisan politics.
How to accomplish both? For one, more openness. The Fed's regulatory decisions have to be on the record, not ad hoc and confidential. And it should disclose every company receiving its loans. Its budget and expenditures should also be transparent, and audited.
Second, the Fed's regional presidents should be appointed by the U.S. president and confirmed by the Senate. America has to know who these people are, and trust they'll act in the public's interest.
Finally, the Fed chair should serve a maximum of eight years. No more Alan Greenspans who reign forever because they have so much power no president dares get rid of them.
RYSSDAL: Robert Reich is a professor of public policy at the University of California, Berkeley.
The U.S. has the most diverse financial system in the world because it has the only dual banking system. Banks can choose a state or federal charter. Our economic crisis was produced by a concentration of economic power in a small number of gigantic institutions which were all regulated by the U.S. Treasury, eithier the OCC or the OTS. Many smaller institutions have been injured by the damage done to the economy, but the smaller institutions did not cause the damage. I disagree with Dr. Reich's assertion that one overarching federal regulator will prevent economic crisis in the future. One regulator will exacerbate the concentration of economic power and reduce diversity in the market for financial services. Government financial regulators, state or federal, must insist on higher capital ratios for large institutions so when they make mistakes the institutions have the ability to absorb the losses. Excessive risk taking and excessive leverage by the giant institutions caused our current problem. The OCC and the OTS did not restrict the risk taking by their institutions. The institutions took advantage of deregulation and outgrew their capital. The federal regulators failed to constrain their growth and risk taking. Concentration of economic power is dangerous for financial institutions, for regulators, and most of all for our economy.
It seems unlikely that anything as powerful and self-serving as the Fed can be reformed if we don't begin by acknowledging the implied difficulty. How about instead of "reform or no reform" we have "reform or disappear"? If Reich is right, isn't that called for?
I would like to vote for the Fed chairman. This position drives the entire future of my country, it has become even more important than the president. I wan't to feel I am imfluencing the path of the country, not watching rich bankers run it.
Professor Reich advocates a change in federal regulation of financial markets in an internally inconsistent way. How can he criticize the balkanized current state of financial regulations, advocate that the Fed become the super regulator and then heavily criticize the Fed's operations? Maybe his inconsistency demonstrates how we got into this mess.
There is a historical explanation as to how this bizarre regulatory structure has developed. The SEC developed as a reaction to the Pecorra commission following the stock market crash of 1929. The CFTC grew from its roots in the Agriculture Department and was meant to stop financial shenanigans that hurt farmers. The Fed was designed to stop bank failures and panics as part of the Progressive era reforms. And the FDIC was a New Deal innovation to provide depositors ease of mind in giving their cash to banks. With the FDIC, smaller depositors could be assured that a bank's failure would not also mean their ruin. Other entities which report to the Secty of the Treasury, have roots in the Civil War.
Taking these disparate entities with different statutes and cramming them into the Fed does not seem to offer any benefits to anyone, except perhaps large financial institutions who under Greenspan were able to get whatever they wanted, and more.
The point is that the Fed failed in its duties. Had it been more vigilant, the Fed could have advocated long ago demanding better accounting and reporting of derivatives. The Fed had the tools to demand that banks put up more capital to support their derivative exposure but they chose not to. Why would the Fed act any differently now?
While centralizing financial regulation in one regulator will simplify government responsibility, such reshufflings of organization charts won't mandate accountability. However, mandating mark to market accounting and mandating that banks increase reserves will slow their urges to bet wildly with taxpayer guarantees. Taxpayers don't like being told that financial institution employees get the best of all worlds - heads they win - but when tails comes up, taxpayers lose.
