The New Regulatory Era

The Obama administration seems to have decided against any major push for regulatory consolidation. Instead, it looks like the Office of Thrift Supervision will be closed but a new regulatory agency will come into being charged with doing basically a “consumer protection” function, as per Elizabeth Warren’s idea. Instead, the big change is going to be create a “council” of regulators, loosely overseen by the Fed, and charged with regulating overall leverage. Presumably the idea is to achieve the core purpose behind regulatory consolidation — someone can watch the big picture — without getting into the messy fights with congressional committees.

One concern here, I would think, would be that this seems like one of several measures taken over the past 12 months that’s likely to reduce the Fed’s independence. The other is that while I don’t think the idea of totally consolidating all regulators into a single shop is truly necessary, the total absence of any consolidation whatsoever is somewhat jarring. We have an enormous number of federal and state financial regulators, and the ability to forum shop simply makes it difficult to do the job right. It’s hard to create one or two agencies that too their jobs really well; it’s going to be very difficult to make sure that nobody’s falling short and creating a crack everything can slip through.

But beyond reading about the broad outlines of the proposal, it’s hard to get a sense of some key factors. Part of the appeal of putting the Fed in charge is that people generally have a good vibe about the Fed. People think the Fed knows what it’s doing. Really smart people want to go work there. Becoming top dog at the Fed is considered a major career ambitions for very ambitious people. Doing a stint there at a low-level is great for your career. When Ben Bernanke talks, people listen. It was the same with Alan Greenspan. And it was the same with Paul Volcker. It’s hard for a lone company or a lone Senator to intimidate the Fed. It’s a big league federal agency, in other words, like the Navy or the FBI; people don’t take it lightly.

I think a big part of the question we’re faced with doesn’t relate to changing the bureaucratic diagrams around, it relates to making more of the regulatory agencies Fed-like in terms of having good people, a good reputation, and a good amount of prestige and self-confidence. The rules are only going to work as well as the institutions charged with implementing them.