Commentary Magazine


Financial Regulation: Quick and Dirty

Today’s big story from Washington will be the release of a “comprehensive plan” for re-regulating the world of finance. The White House floated out an 85-page paper evidently meant to serve as a blueprint for a new regulatory structure. In keeping with this administration’s model of management-by-trial-balloon, the report appears in this morning’s New York Times and Washington Post.

It may not be worth examining the document in great detail, because (again in keeping with Obama standard practice) it most of the implementation details to Congress. So what is in here isn’t going to be close to what we’ll eventually get. But there are several things to note about the process and the philosophy at work.

The single most illustrative thing isn’t in the document at all, but in Obama’s own remarks, delivered in his trademark halting, somewhat diffident manner. The New York Times quotes him as saying:

Did you know, any considerations of sort of politics play into it? We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don’t want to tilt at windmills.

In other words, it’s more important to get something out there and move on than it is to get it right. The president wants to do this quick and dirty.

You heard the same thing in January about the economic stimulus package. You heard it with the GM and Chrysler bankruptcy. You can see it in the president’s impatient desire to disengage from the truly hard problems in foreign policy, which have no quick and dirty solutions. And most of all, you see it in health care, which the president wants to completely reform before the end of July.

What was the process by which this paper was produced? It bears absolutely no marks of authorship. If Tim Geithner is the principal architect, his fingerprints don’t show. What Obama evidently did was to give every stakeholder in the financial industry a chance to express their desired outcome. Then he applied a political filter (“who are the people with the most powerful Senators on their side?”). And then he averaged the result.

What is the operative philosophy at work here? It’s evident from the paper that the blame for the financial crisis is being placed squarely on a lack of proper oversight by Federal regulators, of both financial firms and of financial markets. There’s no recognition of the role played by a powerful combination of low global interest rates caused by emerging-market reserve accumulation, together with rampant technical innovation that sharply increased the liquidity of financial instruments. There’s tangential recognition of the conflicted position of rating agencies, and also that there is such a thing as a “shadow banking system.”

But the real emphasis in the White House report is that there weren’t enough regulators minding the store, so they want to add a lot more of them. There is also a lot of talk about “protecting consumers and investors from financial abuse.” Now that’s so loaded that I don’t know where it really wants to go.

The bottom line is that the White House intends to tighten regulations on the financial system in accordance with the priorities of newspaper headline writers, while being careful not to step on the interests of the financial industry too much. An alternate, and preferable, approach would have been to take the time (even if measured in years) to actually understand the roots and the dynamics of the crisis and respond appropriately.