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Fallout: The Financial Crisis

Fed as super-regulator a super bad idea

Marketplace Staff Mar 26, 2009
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Fallout: The Financial Crisis

Fed as super-regulator a super bad idea

Marketplace Staff Mar 26, 2009
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TEXT OF COMMENTARY

Kai Ryssdal: There’s a wide range of options open to Congress and the White House as they try to work out the details of these new regulations. Commentator and economist Susan Lee thinks one of those options is one too many.


SUSAN LEE: One totally obvious thing has emerged from our current mess: the need for a better, smarter way to regulate the financial system. And the financial-reform lobby has been furiously generating ideas.

So far there have been zillions of suggestions, and I’ve only heard one that stands out as nonsense: making the Federal Reserve into a super-regulator over the entire financial system.

It’s easy to see why this idea is appealing. Right now, regulatory authority is divided among dozens of state and federal agencies. And so it’s possible for somebody like Bernie Madoff, whose business was regulated by three different entities, to elude detection.

So maybe, just maybe, one regulatory superpower could nail criminal activity by individuals, or even mischief by a single institution. But that’s way different than the notion that one giant regulator can spot the beginning of systemic risk.

The current Fed failed to sight a bunch of alarming problems that were occurring system-wide. It didn’t notice the over-leveraged condition at many bank-holding companies; it was oblivious to the bubble blowing up the real-estate market; it ignored predatory lending practices; and it didn’t recognize that a little oversight of the derivative markets was necessary.

The problem, simply, is that a super-regulator requires super-people. People who have super foresight. Since no such people exist, pretending they do will only give us a false sense of security. And we’ll feel betrayed the next time a crisis hits.

If you doubt me, consider that the creation of this super-regulator is being left to a collection of some of the least super people on the planet. The U.S. Congress. And at the head of this effort is Barney Frank. The same person who had the foresight to declare that the financial position of Fannie Mae and Freddy Mac was absolutely solid. He made this declaration just weeks before those institutions collapsed into the hands of the federal government. I rest my case.

RYSSDAL: Susan Lee is an economist in New York City.

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