Regulatory reform

We won't see so much of it for financial services.  I know, I know, a crisis is a terrible thing to waste, etc., but here are a few simple points:

1. Getting current regulators to do a better job may be a better goal.

2. The consolidation behind the Department of Homeland Security has not been a smashing success.  It's too easy for regulators to focus on formal goals of consolidation at the expense of substantive goals of mission.  And the prevention of forum-shopping can be achieved without formal consolidation.

3. The major overseer probably would have to be the Federal Reserve and that would mean the long-run chances for restoring an independent central bank would be slim.  The Fed as super-regulator would be more accountable to Congress than is desirable.

4. Many of the real regulatory problems are due to the preferences of Congressional committees and it is high time we admitted this.  How about reforming them?

Today's regulatory structure is not what anyone would design from scratch.  Still, I haven't seen strong arguments for a major reshuffling of the boxes.  Most of the arguments assume that the box reshuffling is somehow associated with a major strengthening of political will and thus must be a good idea.  I haven't seen a good analysis which holds the amount of political will constant and shows that a box reshuffling will bring major benefits.  In my view box reshuffling may signal political will but it will not itself cause more political will, so we should be holding the political will variable constant when doing our normative analysis.

If there are two ideas I would like to see take root in regulatory reform for financial services, it is the following:

a. Do not trust the states with anything really important.

b. Do not trust international agreements with anything really important.


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