Building Effective Regulatory Agencies


Kevin Drum is sick and tired of arguing what to do with the current banks, and wants to talk about new rules going forward:

The fact is that these people did what they did not because they’re stupid, but because the system practically begged them to act the way they did. That’s what’s broken, and fixing it depends mostly on what kind of new financial regulations we put in place going forward. I guess we’re still in firefighting mode and don’t have time to address that right at the moment, but I’d sure like to start hearing more about it sometime soon. In the long run, figuring out an effective way to regulate leverage, wherever and however it appears, is probably a lot more important than deciding which bureaucratic solution we should use to clean up the corpses currently littering the battlefield.

I’ve been to a number of meetings on this where learned people discuss the future of financial regulation, and a few points keep coming back. One is that regulators arguably already had the authority to nip this problem in the bud. The other is that had regulators tried, only to be met with a decree that they lacked sufficient authority, they always could have gone to congress, laid out the problem, and asked for additional authority. The last is that had any such thing taken place, political pressure probably would have beaten it back. Think about it. Suppose a very senior career civil servant had tried to take action back in late 2005 or early 2006 to bring the party to a premature close. Well, we know the financiers and homebuilders getting rich off the action would have pushed back. And we know that the conservative movement, at that time, deemed anyone who alleged the housing market was looking bubbly to be driven by a partisan antipathy to George W. Bush. What would building trade unions have thought about our regulator? Or Harry Reid from bubblerific Nevada?

It’s just very hard to imagine, in the United States political system as it works, civil servants really being able to crack heads and prevent wealthy individuals from doing something that they want to do and that appears to be benefiting a fairly wide group of other people.

At which point the issue becomes, in my mind, less an issue of how would you write better-written regulations and more an issue of how would you create a more effective regulatory agency? In my view, it would require you to make the senior regulators the kind or prestigious people whose views are taken seriously by the media and the congress. The U.S. isn’t such a small government country that we dismiss all public servants out of hand. When a General or Admiral speaks, people listen. And part of that is that even a Colonel or a Lieutenant is a well-respected figure, and everyone appreciates the sacrifice and public-spirited nature of even the lowliest enlisted officer. Similarly, though the Federal Reserve system may yet find a way to discredit itself, the idea that the Fed Chair should have a lot of power and that his views should be taken seriously is pretty widely held.

The S.E.C. and the F.H.A. and all the rest aren’t even remotely like that. But a President interested in building a new effective regulatory system would need to do something to make them more like that. Probably a new, more consolidated agency. With a new name and a new logo. And you’d need to bring in a few people from the outside to head it up initially, who are seen as respected and having clout. But beyond the first wave, you’d want to professionalize the organization and not have very many political appointees. And in the early years, you’d need to make a conscious effort to show that well-meaning politicians are deferential to the regulators and take their ideas seriously—to establish the presupposition that anyone who doesn’t treat the regulators somewhat deferentially is dodgy and untrustworthy.

Then you’d have an agency that would not only have some kind of authority to regulate leverage. You’d have an agency that if it saw institutions coming up with a clever way to elude its authority could credibly go to congress and the public and ask for changes. What you need is a situation where, if the agency asks for the changes, people see it as public servants looking for authority to clamp down on dangerous activities, not as stodgy bureaucrats getting in the way of all-wise Heroes of Capitalism.