David Brooks: Centralizer
At its base, the Dodd bill gives regulators more information to see when a financial firm is in trouble and more power to force them to get out of trouble. In practice, that will probably mean forcing them to raise capital so they have a bigger cushion against their risks.
Cue David Brooks, who grandly says that this represents "the great age of centralization" and goes on to say that "some Democrats regard federal commissions with the same sort of awe and wonder that I feel while watching LeBron James and Alex Ovechkin." Cute line. So what's Brooks's proposal? Glad you asked.
"It would be smart to decentralize authority in order to head off future bubbles," Brooks writes. "Both N. Gregory Mankiw of Harvard and Sebastian Mallaby of the Council on Foreign Relations have been promoting a way to do this: Force the big financial institutions to issue bonds that would be converted into equity when a regulator deems them to have insufficient capital. Thousands of traders would buy and sell these bonds as a way to measure and reinforce the stability of the firms."
You see the problem here, right? This proposal says that regulators -- who may even be organized into some sort of council or commission -- should watch financial firms and bring down the hammer when they get into trouble. Nothing about Brooks's proposal is less centralized than Dodd's proposal. In fact, they work in virtually the same way.
Now, there's some chance that Brooks is simply explaining his proposal poorly and he actually has in mind something like the Zingales/Hart proposal to use the market price for a special class of debt as a way to trigger automatic regulatory action, which would potentially protect against groupthink and inattentive bureaucrats.
If so, that's great. I'm a fan of this proposal, though no Democrats or Republicans have introduced it in Congress. But so far as what he's written goes, Brooks has created a centralized system that works at the behest of government regulators even as he's written a column criticizing Dodd for creating a centralized system that works at the behest of government regulators. It's a bit weird.
April 27, 2010; 11:22 AM ET
Categories: Financial Regulation | Tags: David Brooks, N. Gregory Mankiw
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