Can't Live With Systemic Risk, Can't Live Without It
I just got off the phone with David Min, a financial-sector expert at the Center for American Progress, who drew an interesting distinction about the White House's financial regulation reform proposal.
The central question animating this regulatory effort, Min said, is, "What do you do about so-called 'too-big-to-fail' institutions?" And there were two approaches you could have taken. One would've been to limit the ability of firms to become too big to fail. You could have done this by capping assets or developing Glass-Steagall-like legislation to separate out core functions. The administration didn't do that.
The other path was to assume that too-big-to-fail institution were "baked into the cake." The question, in this version, isn't how to break them apart but how to live with them. And that's the approach you see in this proposal. It's a regulatory package for a world in which some institutions pose a systemic risk, not a legislative effort to create a world where institutions can't post a systemic risk.
That means -- and this is me, not Min, talking -- that the devil is really in the details: It's pretty easy to understand how you protect against systemic risk in a world where no one poses a systemic risk. It's harder to be confident in the ability of regulators to continually outwit highly paid bankers 30 years from now, after memories of this crisis have faded a bit. That's not to say it can't be done. But it requires not only a pretty visionary -- and fairly frequently updated -- regulatory system, but a genuine and continual commitment to the health, independence, and funding of these agencies.
June 17, 2009; 2:15 PM ET
Categories: Financial Regulation , Solutions
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