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)
June 10, 2009; 3:58 PM ET
Categories: Financial Crisis , Financial Regulation , Solutions
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