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Too big to… succeed?
Today’s big story is Treasury Secretary Tim Geithner’s proposal to Congress for regulating the financial system. You can read summaries of his testimony from Reuters, Marketwatch and The Washington Post. I’d like to highlight a couple things Geithner said, and a couple things he didn’t say.
What he said, in a nutshell: One, the government needs to address systemic risk, the “too big to fail” problem. Two, consumers and investors need more protection — better enforcement of existing rules, closing loopholes, increasing transparency — in an effort to prevent lending abuse, Madoff schemes, AIG shell games. Three, regulate the unregulated or barely regulated — hedge funds, non-bank financial companies, credit default swaps, executive compensation. Four, empower a single federal agency with policing risks in the financial system and assign clearer authority for other regulatory agencies. And finally, coordinate regulation with other countries.
Let me catch my breath for a second. The plan sounds like a brilliant model for retroactively preventing the collapse that’s already happened, but is it too ambitious, excessive and unrealistic?
First, let’s start with who’s doing what. Actually, we can’t do that. Geithner didn’t tell us.
He said we need to start with the reforms…
“rather than the complex and sensitive questions of who should be responsible for what.
We must not let turf wars or concerns about the shape of organizational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people.”
But it’s widely thought that the Fed will become that “super-regulator,” the single agency in charge of managing risk. And if that’s the case, you are switching from a model of micro-oversight to a macro model where there’s only one place for the buck to stop. Now, it’s obvious the current model has serious flaws. But if the Fed whiffs, considering the bazillion tasks it’s already shouldering and considering its demonstrated lack of foresight, then what? Seems to me, who’s doing what is a very big deal.
But let’s go back to the reforms, since that’s what we have in front of us. Geither not only wants to overhaul the US regulatory system, he also wants to work with the entire world to create a new one:
Geithner said that “at the center” of his proposal is the knowledge that the U.S. cannot move alone. “We will launch a new initiative,” he said, “to address prudential supervision, tax havens, and money laundering issues in weakly regulated jurisdictions.”
I understand the need for international cooperation in a global economy, but he’s going to get serious push-back from other countries on this. A deep world recession is exactly the wrong time to try and coax world leaders out of their protectionist shells. It just won’t happen. Besides, name one area in which global policing is effective. How about we focus on what this country needs to do first?
On a related note, the Becker-Posner blog takes the view that now is exactly the wrong time to do any of this regulation:
“But the most important point I would make is that there should be no new regulatory measures until the depression reaches bottom and recovery begins … Any regulatory initiatives at this time will simply increase the already great uncertainty in which the financial industry is operating; and as Keynes pointed out, anything that increases uncertainty in a depression causes hoarding, which can in turn precipitate a deflation likely to deepen and protract an economic downturn.”
We have to start on the regulation some time, but there is a system in place and many of these problems could be solved by tweaking the oversight instead of throwing the baby out with the bath water. Then there’s that other saying. Haste makes… bailout sink holes.
Finally, Geithner said this:
“… we need to establish a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions.”
A glaring omission here — why should these extra-large financial institutions be allowed to exist in the first place? Instead of trying to prevent them from failing, why aren’t we trying to prevent them from being?
This was a point of discussion at our morning meeting. Marketplace Senior Business Correspondent Bob Moon asked why do we have antitrust laws? They’ve done very little to stop corporations from becoming industry-devouring-and-destroying Pac-Men. The American system has prided itself on survival of the fittest and dog-eat-dog and all that, but once upon time, wasn’t it also about making sure there was competition left and that no one got too big to take down the system?
Just some things to consider as we start down this road of regulation. We didn’t think long and hard about some of the bailout moves, but we do need to think carefully here. Geithner says he wants to simplify regulation, make it clearer. And that’s great. But I’m not sure overreaching or forgetting what we already have in place will accomplish that at all.