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Make Haste Slowly

This guest post is from Martin Baily, Charles Taylor and Peter Wallison of the Pew Financial Reform Project.
The patchwork of federal agencies that was charged with overseeing  the financial system failed to protect us from crisis last year, and everyone in Washington agrees that it needs fixing. However, the regulatory reform debate is proceeding piecemeal and at breakneck speed -- an unnecessarily risky strategy given the stakes involved. The regulatory infrastructure that will be implemented will affect the U.S. and global financial sector for decades to come. A fact-based, bipartisan approach is a much more certain path to get us to where we need to go – toward the creation of a competitive, fair and stable financial system for the 21st century.
There is time to be methodical about reform.  It will be a while before financial institutions resume significant credit expansion: The danger of excessive credit creation is a long way off.
What “methodical” means in this context is to proceed deliberately, with deference to the factors that precipitated past crises and with an eye to those that may arise in the future.  The legislative process now underway may not do this.  Many in Congress are worried that they do not see the full picture yet and there is no clear and widely shared understanding of what caused the current crisis. As interested stakeholders try to preempt the debate in their favor, a foundation of bipartisan understanding of the facts and the issues will be enormously important for keeping the debate on course and ensuring sound and enduring outcomes.

While the administration’s proposed regulatory plan tackles many important problems, there are many questions it does not address -- agency balkanization, the performance of regulators and the rationale for concentrating a great deal of power in a single agency. What is the vision that justifies the shopping list of specific remedies? Will the administration’s plan do enough to reduce the odds of another major crisis? These are big and basic issues.

There must be agreement on the facts. What went wrong and why? Not just in the current crisis, but in other crises in the United States and elsewhere in the world. What is it about financial systems that make them unstable? What were the reasons that regulation failed -- even when there was statutory authority to intervene as things started to go awry?

And, there must be a compelling vision of the future financial system. Could this be a system dominated by large institutions? Could it be one in which traditional divisions between types of institution are maintained in perpetuity? Will deposit-taking continue to contract and other ways of capturing savings continue to expand? Will the system be more, or less, diverse? Congress needs a bipartisan, widely held understanding on the main features it does -- and does not -- want to see in the U.S. financial system as it evolves. Between the start and the end point, Congress needs a view of what regulation should aim to do, to supplement and shape what the private sector will do anyway. With strong governance and appropriate capital structures, how can supervision and regulation add materially to the safety and soundness of institutions? How can supervision be made more effective and supervisors be made more accountable?

It is only when a view has been formed about what regulation should do that it makes sense to decide where regulation and supervision should be carried out. So, for example, the current debate on systemic regulation – whether the Fed or a new council or agency should take the lead – is premature. First we need a view on what systemic risk regulation involves in different states of the financial system. Does it mean monitoring the system for early signs of heightened exposure to systemic risk? Does it necessarily include oversight of “systemically significant” institutions? Once a view on these and many other functions is formed, then Congress can develop a view on the best organization structure to carry out those functions.

These are not unanswerable questions and need not take years to resolve. Bipartisan consensus can be found and forged within the next year. Form follows function; function follows purpose; purpose follows vision. There is enough at stake that Congress should take the time to get it right.

--Martin Baily of the Brookings Institution and Peter Wallison of the American Enterprise Institute are the co-chairs of the Pew Financial Reform Project. Charles Taylor is the project’s director.

By Terri Rupar  |  July 24, 2009; 8:15 AM ET
Categories:  Regulation  
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Your post infuriates me. Bipartisanship is a false idol. No compromise is reasonable when one side has a delusional view of market mechanisms (among other things.) Congressional Republicans have been unwilling to budge on even the most basic reforms, and despite all evidence to the contrary, still have the mistaken belief that tilting at regulatory windmills will save the economy. The consent of these mastodons is neither wanted nor desired. Further delay will simply squander the momentum and urgency of this crisis, and provide time to fool the American public yet again into acting against their own interests.

We need real reform, and we need it immediately. Your argument that we need time to craft regulation is disingenuous: we already know what to do, with minor tweaks: our grandparents, even without the dubious benefits of computer models and Chicago economics, crafted laws that gave us 60 years of prosperity. As soon as we repealed those laws, our economy began to unravel. Perhaps if we stop arrogantly assuming past generations were wrong and that we necessarily know better, and re-institute mechanisms like Glass-Steagall and humane bankruptcy laws, we can return to having a free, fair society organized for the benefit of all.

Posted by: DanielColascione | July 24, 2009 12:40 PM | Report abuse

"...our grandparents, even without the dubious benefits of computer models and Chicago economics, crafted laws that gave us 60 years of prosperity."

I believe you have this exactly backwards.

It is BECAUSE of things like computer models (and perhaps even Chicago economics) that our historical financial regulatory framework became unworkable. Finance is global, and to compete our firms in to have the flexibility to arrange themselves appropriately. Further, I have not seen a creditable argument (let alone a data point) that suggests the end of glass-steagall or inhumane bankruptcy laws either generated or helped spread this crisis.

Posted by: fatinspanish | July 24, 2009 4:30 PM | Report abuse

Richard Petty, in an Esquire magazine piece, is quoted as saying, "When I first started racing, my father, one of the first things he said, he said, "Win the race as slow as you can.""

It's good advice to make haste slowly: it worked for NASCAR and it echos the wisdom of our founding fathers, having established our system of governance to do just that--impede the impetuousness of concentrated power to imperil ourselves and others.

Bi-partisanship, multi-partisanship, whatever party of stakeholders that have the merit to participate in and be effected by our financial industry should be at the table. We must fully articulate all positions and then let the debate ensue... one that will hopefully result in clarity and concision about the main forces and approaching factors we must deal with for our best future possible.

But in any such a deliberative process one would hope that we focus more on accuracy and less on precision to first define the context and effectively frame the issues. Too many logical fallacies, obscure inference and obfuscatory data have been allowed to intrude into public policy discussions and thereby claim air to legitimacy simple by sharing the stage in context... of course a cynic would say that this blather is merely window-dressing on deals already done by industry insiders and lobbyists. It is hard to refute this view as there has been no end to the bait and switch of true fact with self-vested opinion when there is money on the table and somebody has to lose a buck.

Whatever committee forms and deliberations ensue, they should be overseen and mediated by our national treasure of top and highest regarded literary editors so that we might gut the proceedings of bogus language, omissions, unsubstantiated inference, false facts and all the other spin distortions and Orwellian rhetoric that have been allowed into public debate in order for such debate to be held without public participation.

Posted by: SocialWealth | July 25, 2009 5:32 PM | Report abuse

There are several key issues that are not addressed in the Obama reform proposals, nor are they addressed in Bailey's posting:
1. Should we limit the size of institutions? I heard Bernanke talk about a systemic regulator to assess "too big to fail," but he never broaches the simple solution of breaking up the behemoths into institutions that are not too big to fail.
2. Should we reinstitute the usury laws that Western society imposed for millenia or should we continue to allow 20%-30% rates on credit cards and 100s of percentage points on payday loans and other sharking schemes?
3. Is there a way to put boards of directors of corporations back in control? Today, the CEOs and their henchmen are free to loot the corporation and pay themselves first.
4. Is the Fed a democratic regulator or a self-serving society for bankers?

Since Congress does seem to be moving forward with some sort of comprehensive investigation of the causes of the crisis, it would make sense to wait for that outcome before tackling major regulatory issues. Until then, it would make sense to enact the consumer financial protection agency and temporarily give the FDIC or another agency sufficient resolution authority to handle cases like Lehman Bros.

Posted by: charliecoop | July 28, 2009 10:20 PM | Report abuse

Points 1 and 3 in Charliecoops post are addressed in the administration plan...explcitly.

Posted by: fatinspanish | July 31, 2009 3:39 PM | Report abuse

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