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Fallout: The Financial Crisis

One regulator to rule financial system

Marketplace Staff Jun 3, 2009
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Fallout: The Financial Crisis

One regulator to rule financial system

Marketplace Staff Jun 3, 2009
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TEXT OF STORY

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.

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