Should We Have One Regulator or Many?

policeEveryone seems to have an opinion about whether reregulation of the financial institutions should vest control in one super-regulator or a sharing of responsibilities among a handful, so I’ll throw my two cents worth into the pot. Though inefficient it is, I would prefer to see some sort of a power sharing regime.

Here, in no particular order, are the reasons I gravitate towards that scheme.

First is the issue of regulatory capture. The potential for the regulated to co-opt the regulator is lessened if there are multiple points of contact. That doesn’t mean that it can’t happen just that it’s a harder task. To some extent, multiple regulators might well act as a check on each other as competition to prove superior oversight develops among the group.

Though it’s not often mentioned with regard to regulatory capture, there is a need to be alert to capture by the executive or legislative branches of government. The single regulator concept was applied to Fannie and Freddie and that regulator was effectively neutered by Congress for many years. Multiple regulators would be much harder for politicians to turn. There is also some comfort in numbers, so that as part of a group regulators could potentially feel more at ease bucking the demands of Congress.

Second, if a single regulator concept is adopted, that regulator is likely to be the Fed. It’s currently forced walks a fine line with Congress and whatever administration might be in power and some would suggest that it’s been derelict in walking that line lately. When it works properly, the Fed is an independent body beholden to no one that makes decisions in the long-term best interests of the country. Set it up with overall regulatory authority and it is forced into a position in which it must negotiate its positions.

The Fed doesn’t need to ask for permission to raise or lower rates, it does so as it sees fit. As a regulator, it would have to work with and reach compromises with the other branches of government as it was called on to set regulation. The fundamental relationship between the government and the Fed would change and I fear that it’s independence would be eroded.

Third, the only certainty in designing a new regulatory framework is that at some point in the future it will fail and probably catastrophically. That’s the nature of regulation. It never prevents the big crash, it just buys you periods of stability. When that happens, the pitchforks come out and blame is going to be assessed. Someone has to swing from the yardarm. If you have multiple agencies involved in regulation, the blame can be spread around and you don’t need to necessarily destroy the regulator in order to satisfy the mob. You find the least politically powerful player, load the fault on his back and move on.

Fourth, the country has a system that spreads power around. Part of the genius of the system is that it denies any particular party or person from accumulating kingly powers. It’s a messy system that forces decisions to be made by multiple parties in anything but a streamlined fashion. Change, when it comes, tends to be incremental and rarely revolutionary. This troubles many who would like to see their agendas swiftly and completely in force but prevents government lurching from one in vogue idea to another.

It seems to me to make sense to mirror this dispersion of power in a financial regulatory system. Vesting technocrats with the sort of power that we deny elected representatives makes no sense while requiring them to engage in the art of compromise and debate among themselves is a worthwhile outcome. This is probably one instance in which too many cooks will produce a better soup — or at least one that a lot of people agree they want to eat.

Those are my arguments. Lots of room to poke holes in them if you choose but be prepared to defend your alternatives.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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