Financial Regulation: You Don’t Get a Vote!

Barack Obama came to office as the conciliator, the bipartisanizer, the anti-Bush. But this is going too far.

The administration’s style has been to float policy proposals in public, listen to the responses (from other politicians, from the private sector, and from the blogs that Obama does not read), and adjust accordingly. When it comes to the financial regulation proposal that Tim Geithner is scheduled to deliver on Thursday, there may be little left after all the adjusting.

We heard last week that the initial plans to consolidate regulatory agencies have been scrapped, with the exception of closing the hapless Office of Thrift Supervision. Now The New York Times has a story that is ostensibly about the feud between John Dugan, the Comptroller of the Currency (and regulator of many large national banks), and Sheila Bair, head of the FDIC, but is also about the compromises that have dictated the administration’s regulatory plan.

The Treasury secretary, Timothy F. Geithner, the main author of the administration’s plan, in recent weeks has refereed among the competing views of Ms. Bair, Mr. Dugan and Ben S. Bernanke, the Federal Reserve chairman. . . .

With the administration and crucial lawmakers rejecting a single agency, the four officials have often disagreed on just how to streamline and strengthen regulation. Some points of contention include views on which agencies should play central roles in overseeing financial companies whose troubles could pose problems for the overall system, and whether to create a new agency to protect consumers from abusive mortgages or credit cards.

Officials say the latest version of the plan, in large part, is a compromise of various viewpoints.

I don’t want to get into the merits of these issues here. But when you are reforming the regulatory structure of an industry where the existing regulators got it horribly, embarrassingly, catastrophically, world-historically wrong, the last thing you want to do is strike a compromise between the positions of the existing regulators. Members of Congress get votes, and they already have enough ties to the banking industry to worry about; letting the regulators, who don’t have votes, shape the deal makes it more likely that the final result will be watered down into nothingness. Which, of course, is exactly what the industry wants:

Most of the banking industry couldn’t be happier with the current system. Bank executives and lobbyists say that the system, while flawed, enables regulators to tailor rules for a variety of financial institutions.

I know that it’s not as simple as saying that regulators don’t have votes, because they certainly have allies that do have votes, and they have allies who give money to the people who have votes. But the underlying problem is that somehow the Obama Administration managed to back itself into a corner where it had no one but the existing regulators to turn to. Geithner, Bernanke, Dugan, and Bair were all manning the ship when it hit an iceberg, and only Bair can claim that she arrived late enough not to share in the blame. (Bernanke, though he became chairman of the Fed only in 2006, was on the board of governors from 2002 and then was head of the Council of Economic Advisors.)

Shouldn’t someone with an independent perspective have been charged with this task? Paul Volcker, whom we heard so much about during the transition? Warren Buffett, whose name Obama liked to use on the campaign trail? Austan Goolsbee? Christina Romer? What happened to the best and the brightest?

All I can think is that Obama basically doesn’t think that financial regulation is that important. Or he thinks that the existing system is close enough. Or he figured that Congress would have the final word, anyway.

Or maybe Larry Summers will pull a rabbit out of his hat since, according to the Times, he is in charge anyway. While I have criticized his anti-regulatory positions of a decade ago, by his reputation – brilliant, strong-willed, etc. – I would expect more from him than from the bank regulators who helped bring us the crisis.

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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