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Is The Administration Embracing a "Lock the Barn Door After the Horses Are Out" Theory of Financial Reform?


That, right now, is the concern. In recent weeks, there have been some ambitious plans previewed out of 1600 Pennsylvania. Efforts to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission, for instance. But as David Cho, Binyamin Appelbaum, and Zachary Goldfarb report, much of that is being walked back. And the administration seems to be embracing a theory of reform that's pretty troubling. Take this exchange between Sen. Ben Nelson (D-Neb.) and Treasury Secretary Timothy Geithner from yesterday's subcommittee on financial services hearing:

SEN. NELSON: Let's don't cure problems that don't exist as we try to take a, quote, unquote, "comprehensive approach." Let's just make sure that it's not so comprehensive that we sweep in regulatory schemes and mechanisms that are currently working.

SEC. GEITHNER: Senator, I completely agree. And we're bringing a broader pragmatic spirit to this exercise, and trying to focus on things that were central to the crisis, not things that were not; on things that are necessary to do, not just those -- not those that would be desirable to achieve over time.

The administration's regulatory proposals won't be released till next week, so it's hard to say precisely what this "pragmatic spirit" means in practice. But plainly read, it seems like Geithner is saying that the administration has decided against using this moment for a wholesale reform of the financial regulatory structure, and instead is contenting itself with addressing only the specific issues that led to the current crisis. That's not the optimal approach.

The next financial crisis, of course, won't look exactly like this financial crisis. It's unlikely to be the product of a housing bubble, or unpriced risk in the securitization market. Addressing those topics might be important, but it's a bit like cordoning off the stove after your toddler has already burnt his hand. Worth doing, but the lesson has probably been learned.

There are, of course, regulatory flaws that contributed to this crisis and could well contribute to a subsequent catastrophe of a different sort. Systemic risk, for instance, is likely to contribute to any serious crisis. But there's much about our regulatory system that we know to be insufficient but that wasn't specifically implicated in the 2008-2009 meltdown.

And we shouldn't ignore all of it. Rahm Emanuel had a smart line toward the beginning of all this. "Never let a crisis go to waste," he said. A devastating economic crisis born of insufficient deregulation in the financial industry is about the best opportunity you're going to get to reconstruct the regulatory scaffolding around Wall Street. This was Willem Buiter's argument when he counseled that "it is better to over-regulate now and subsequently correct the mistakes than to risk another era of self-regulation and soft-touch under-regulation of financial markets, instruments and institutions."

It will always be easier, in other words, to remove regulation the financial industry doesn't like then add regulation that they don't want. And it's never going to be easier to regulate the financial sector than it is right now. Which is why responding to this crisis by merely regulating against its recurrence is sadly narrow. It promises a world in which the regulatory state is always trying to catch up to what it just allowed to go wrong. The point of regulation is to prevent the next crisis, not the last one.

Photo credit: AP Photo/Gerald Herbert)

By Ezra Klein  |  June 10, 2009; 3:58 PM ET
Categories:  Financial Crisis , Financial Regulation , Solutions  
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The problem isn't the Obama Admin. It's Congress. Not just that so many of them are beholden to the financial services industry. Though that they are. But they derive institutional power from the way regulation is configured.

So we may get microbursts of self-defeating populism -- like pay restrictions -- but nothiing seriously designed to challenge the structure of the system.

The folks who want in retrospect to make Brooksley Born into some sort of Joan of Arc of the1990s ignore the fact that nothing she wanted to do in terms of additional regulation was going to happen, whether the Clinton Admin supported it or not.

The same applies today with the need to rationalize the alphabet soup of regulatory jurisdiction. This isn't just an old problem, it's an ancient problem. S&Ls and the OTS should have been abolished under the Reagan Admin for heaven's sake. But we're still suffering from the continuation of a business model that's been obsolete for 3+ decades and a regulatory institution that thrives only as it manages to coddle the financial institutions for which it's responsible.

And there's no way, given the power of Ag Comm's in both houses of Congress, that the capital markets will be brought within a single regulatory authority's mandate. Even though that has been an obvious requirement for most of the past half-century.

So focus attention on what, within Congressional constraints, is doable. Where do you think the Obama Admin is wimping out, wasting its crisis, given Congressional realities?

Posted by: nadezhda04 | June 10, 2009 4:38 PM | Report abuse

nadezhda04 I think that's an excellent analysis, and I completely agree.

Lots of Obama supporters WISH he would do this or that, but the fact is the man has a wonderful feel for the realities of where he can spend his power and where he will only fritter it away. I think many of his supporters don't appreciate this very well.

For this administration to take on the task of reforming the entire financial system in a real way would use up a lot of its power, irreplaceably. To tackle it on the scale that nadezhda04 summarizes would be a huge ambition, the size of an entire administration's tenure. Not an unworthy ambition, but not Obama's, not today. Someone else, some other time.

Obama has said all along that this is not his crisis, not his fight. I think we have to respect this reality. There's only so much he can do, and that's not a phrase, it's a cold calculation.

After all, the U.S. President wields a very conditional and circumstantial kind of power, and it's limited in quantity, as befits one of three branches of government.

Obama strikes me as one of the master politicians of this century. I think he has his capital calculated at all times to a fine degree, and always spends well within his budget, saving his full power for the killing blows - which we will see rarely, if at all. His power grows as he DOESN'T use it.

Posted by: wapomadness | June 10, 2009 8:26 PM | Report abuse

America needs 100 million jobs RIGHT NOW that
pay enough to survive on and full medical benefits.
That's it. It would be more helpful if the job paid
enough money to support a family with and offered
the same medical coverage that Congress enjoys.
No more ifs, ands, or buts. We are IN a depression.

Posted by: blakesouthwood | June 11, 2009 1:53 AM | Report abuse

I agree that Congress is to blame for not passing a new deal
and universal health care for all American citizens. While we're at it all schools should only teach in English. I'm sorry, but this is America. And in America we teach in English JUST LIKE IN INDIA.
They should take the initiative and put everybody to work.
We need to both rebuild America and out military. There's no better time then the present. It also wouldn't hurt to build massive solar electric farms and work on deals with Canada for the water that we'lre going to need so dig some canals to improve our crop production. We need affordable housing. Congress wake up and smell the situation for what it is. America needs Congress and Congress needs America. No more obfuscating. No more delays.

Posted by: blakesouthwood | June 11, 2009 1:57 AM | Report abuse

Here you go one more time with this lucky guy – he keeps on proposing wrong things, keeps on scheming non-useful things; but gets lucky in the end to get free. He is our Treasury Secretary. Indeed his séance about regulation is one more exhibition of convoluted thought process:
- First ignore suggestion of Sheila Bair of FDIC for council of regulators; then adopt it. (Rep. Barney Franks what this council as the last word on systematic risk of global scope and assigning of emerging, unusual circumstances to appropriate agency.)
- Next go about scrapping SEC, but then balk on that due to Congress pressure.
- Next go for an ill advised strategy of centralizing all regulatory power with Fed; then retract on that.

No, these guys will not change.

What you need to do Ezra is put up an open context of naming ‘next bubble’ and then keep pounding our leaders about that. So in future when indeed such a bubble arises, their famous words and denials can be flogged in public.

What about the speculation in Oil? Is it there now or it is not at present? Is it a short term bubble? Any solutions from these bright minds who are pondering over financial regulation?

Posted by: umesh409 | June 11, 2009 2:43 AM | Report abuse

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