Fallout: The Financial Crisis

Predict a bubble, and then what?

Amy Scott Oct 1, 2010
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Fallout: The Financial Crisis

Predict a bubble, and then what?

Amy Scott Oct 1, 2010
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: The group in question is called the Financial Stability Oversight Council. The Dodd-Frank reform bill set it up. Besides the Secretary of the Treasury and the Chairman of the Fed, the panel has a bunch of other high-level regulators on it. They’re stuck with the unenviable task of trying to find the next monster under our economic bed. There are some political turf wars a-brewin’, but even if they can all get their act together, how much can this council really do? Because our track record on popping bubbles painlessly just isn’t so good.

Marketplace’s Amy Scott reports.


Amy Scott: First, they can make public statements.

Former Fed governor Randall Kroszner teaches economics at the University of Chicago’s Booth School of Business.

Randall Kroszner: What is sometimes called “open mouth operations” can be effective. They provide a warning that supervisors see some potential risks here, and that causes the private market actors to reassess those risks.

Second, they can change the rules. These are the top financial regulators. For example, if the housing market somehow heats up dangerously again, Kroszner says the council could raise the required down payment on homes. The trick may be recognizing the bubble in the first place and having the guts to speak up.

Cornelius Hurley directs the banking law program at Boston University. He says in a group of 10 voting members, it may be too easy to hide.

Cornelius Hurley: That’s been the criticism of the council all along. It diffuses responsibility too widely, and at the end of the day, no one person is responsible.

In the late 90s, a regulator named Brooksley Born sounded the alarm about derivatives. Those complex financial instruments helped fuel the recent crisis. Hurley says Born was shouted down by other regulators.

Hurley: So we have to find in our system a place for the Brooksley Borns of the world going forward.

Whether this council will be that place is unclear. Hurley says regulators are a lot more humble than they were before the crisis — or should be.

I’m Amy Scott for Marketplace.

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