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Deregulating Responsibility

By Joseph Lawler on 6.18.09 @ 5:17PM

So the new regulations proposed by the Obama administration call for three new regulatory supervisors: Financial Services Oversight Council, to coordinate heads of existing regulatory agencies to identify systemic risks; the National Bank Supervisor, which will regulate federally chartered banks; a Consumer Financial Protection Agency, to prevent mortgage and credit card dealers from confusing clients, and added powers for the Fed to regulate non-bank financial entities. These are all added to an already bewildering lineup of regulators -- reading through the Treasury Dept.'s white paper, I read of at least three that I had never heard of before. 

I have a question about this proposed overhaul. In general I think that simpler regulations are better than complicated regulations, even if they are more restrictive, because at least then at least the regulators can clearly identify illicit actions, and the regulated can't waste everyone's time trying to game the system with complicated maneuvers. 

I wonder, though, whether we're reaching a point where more added regulators and regulations make things so complicated that they are actually counterproductive by their own standards. If you are a systemically important bank, under the proposed system there would be at least a half dozen big time regulators watching your moves. Do you develop a check-the-box mentality? Do you start to think to yourself, "well, if I'm not getting in trouble for it, I must be fine"? (Obviously this is a gross simplification and anthropomorphization.)

Remember, the argument for increase regulatory powers for the Fed was that the Fed should have supervision over any firms it might be later called upon to bail out. The flip side of that argument, however, is that if the Fed has been supervising you all along and you become insolvent, you can expect the Fed to bail you out.