Tunnel at the end of the light?
The WSJ reports on proposed reforms of the US’s financial regulatory infrastructure, which, if they are approached thoughtfully, will take at least several years to implement. One of the perils in this laundry list of reforms is that a dated, and therefore inherently too laissez-faire regulatory structure, could, through insipid “reform”, become unwieldy and no less ineffective in addressing the serious problems of today:
Mr. Paulson’s plan will include merging some agencies, such as the Securities and Exchange Commission with the Commodity Futures Trading Commission, while broadening the authority of others, such as the Federal Reserve, which appears to be a winner under the proposal. Mr. Paulson is expected to recommend that the central bank play a greater role as a “market stability regulator,” with broader authority over all financial market participants.
Mr. Paulson is also expected to call for the Office of Thrift Supervision, which regulates federal thrifts, to be phased out within two years and merged with the Office of the Comptroller of the Currency, which regulates national banks…
A key part of the blueprint is aimed at fixing lapses in mortgage oversight. Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department’s plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination…
Mr. Paulson is expected to repeat his assertion that the Fed should have much more access to information from securities firms and investment banks that might borrow money from the central bank. Presently, insurance is regulated on a state-by-state basis, but the Treasury review is expected to call for the creation of an optional federal insurance charter that would be overseen by a new Office of National Insurance….
Treasury officials have also designed what they believe to be an “optimal structure” of financial oversight. It would create a single class for federally insured banks and thrifts, rather than the multiple versions that now exist. It would also create a single class of federally regulated insurance companies and a federal financial-services provider for other types of financial institutions.
A market stability regulator, which would likely be the Fed, would have broad powers over all three types of companies. A new regulator, called the Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.
We’re in favor of regulatory reform, great and small, since huge amounts of financial risk (eg, $45 trillion) have been transferred to firms that are, in a perverse sense now, too small to fail. We may not see the resurrection of the almighty dollar any time soon, but some of these proposals for reform appear to be constructive, if they are properly targeted, which is always a concern. We certainly do not want “a re-creation of the 1970s to avoid the 1930s” if we can help it. We’ll just have to see whether the politicians can resist at least some of their bad ideas.
UPDATE
One bit of good news is that this is not apparently going to be a rushed project, according to Paulson. WSJ:
“Once we are through this period of market stress, we need to begin the serious work of modernizing and reforming the structure, which will require a great deal of discussion and many years to complete,” Mr. Paulson said, stressing the need to separate long-term reform from immediate concerns. We will not seek to implement [the reform proposals] on a pace or in a manner that interferes with our first priority of working through this current period of market difficulty”…
More worrisome perhaps is that Barney Frank, who has had some bad ideas lately, called the Paulson initiative a “constructive first step.”