Fallout: The Financial Crisis

Who should have the power to regulate

Steve Henn May 20, 2009
Fallout: The Financial Crisis

Who should have the power to regulate

Steve Henn May 20, 2009


Kai Ryssdal: Political debates in Washington are a dime a dozen, if not cheaper. But the one Congress is gearing up for now is a biggie. This sounds a bit grand, but it’s basically about how capitalism ought to work. How should banks and hedge funds be regulated? How — and how well — should executives be compensated? And what should the government do to protect the public from the crisis that we’re living through now ever happening again. We asked Marketplace’s Steve Henn how negotiations might play out.

STEVE HENN: It’s mostly behind the scenes right now, but it’s shaping up to be a nasty fight. Imagine for a second you are a consumer advocate, like Ed Mierzwinski from the U.S. Public Interest Research Group. You’re convinced whacked out executive pay incentives on Wall Street encouraged the risk taking that led to this crisis.

ED MIERZWINSKI: Calling it executive pay is almost a misnomer because junior bankers were receiving million-dollar bonuses.

If you’re Ed, in your corner you have 200 million angry Americans and lots of financial heavy weights. So you might think that putting some limits on how Wall Street structures paychecks would be a slam dunk.

But just imagine, for a second, who you are up against.

STEVE Talbott: It will be every major and minor business and industry and every publicly traded company.

Scott Talbott is a lobbyist with the Financial Services Roundtable. He acknowledges that bonus incentives were a problem but…

TALBOTT: We think that the best place to set compensation is by compensation boards.

In other words, let the boards of directors decide. And most high-tech, pharmaceutical, and oil industry executives agree.

And this is just one relatively minor issue in a package of reforms the administration is considering, including Harvard law professor Elizabeth Warren’s idea for a commission to protect consumers for a deceptive mortgages or credit cards off the market before they blow up in consumers’ faces.

ELIZABETH WARREN: Those consumer financial products, ultimately, the dangerous ones, the ones full of tricks and traps, they destabilized this entire economic system.

The financial service industry hates the idea of a consumer product safety commission for banks, so it’s lining up against it. Lobbyists like Talbott argue a new consumer advocate isn’t necessary.

TALBOTT: I would think that the Fed considers the consumer angle in everything that they do. They have to, that’s their role as the regulator for the financial institution.

But consumer advocates like Ed Mierzwinski say the Fed failed in that role.

Mierzwinski: The Federal Reserve blew it, and they blew it badly.

Mierzwinski says not only did the Fed not protect consumers, it didn’t keep the system stable either.

Mierzwinski: Plain and simple, the Federal Reserve is not accountable to the public. And that may be good for monetary policy, but it’s not good for risk.

Still, the big financial services companies are pushing Congress to make the Fed the overarching regulator for the financial industry, responsible for stopping threats to the entire system.

And that will be another big fight.

In Washington, I’m Steve Henn for Marketplace.

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