Tuesday, June 9, 2009

It’s almost enough to make you wish for another crisis

From Reuters:

Felix Salmon

nonrival, nonexcludable

June 9th, 2009

Regulatory reform, RIP?

Posted by: Felix Salmon
Tags: regulation

According to Damian Paletta, the Obama administration has missed its chance to do some serious regulatory reform, and instead is likely to keep most of the existing alphabet soup intact. He says that the administration “isn’t expected to call for the Federal Reserve, Federal Deposit Insurance Corp. or the Office of the Comptroller of the Currency to cede their primary authority to supervise banks” — which is one of the most depressing things I’ve read in weeks, if only because it’s self-evidently ludicrous.

You can’t have three different regulators all with “primary authority to supervise banks”, not if you know what “primary” means. It’s almost enough to make you wish for another crisis, just to enable the kind of root-and-branch regulatory reform which has been desperately necessary for decades."


I believe that there is a difference between:

A: The need to act quickly, massively, and decisively, to end an economic crisis such as Debt-Deflation. If anything, although the government’s actions have been all of these things, I believe that more could have been done even quicker. However, I’m not pulling this criticism out of a hat. I’m basing it on the fact that I believe that Bernanke’s own writings, and Paulson’s Plan put forward in March of 2008, show that their response lagged their own understanding of the problem and its solution. Nevertheless, a good job has been done, and I understand how and why things have gone the way that they have.
B: The restructuring of our financial system, which should, contrary to A, be slow, well thought out, and subjected to a thorough debate. I simply don’t believe that acting in haste in this restructuring is wise.

The basic argument against B seems to be that, after the crisis passes, the electorate will become complacent, and things will go back to business as usual. We need new regulations and regulators now. There’s obviously some truth to this view, since that’s what seems to have occurred after the S & L Crisis. The problem is that, to the extent that this malady influences the electorate, it can also influence regulators. Indeed, that also seems to be what happened after the S & L Crisis. So, the criticism, if not exactly self-refuting, does seem to generate its own problem.

My solution, Narrow Banking, is probably one of the least likely possibilities going forward, but, if it were to be adopted, it should only be adopted after careful consideration. Indeed, the plan I endorse was considered, but not adopted, during the Great Depression. It was called the Chicago Plan, and was put forward by Frank Knight, Henry Simons, Jacob Viner, and Irving Fisher.

In my view, after WW II, the idea lagged, as its proponents or followers worried, quite rightly, about the growth of government and inflation. Two notable fans of this approach were Milton Friedman and Hyman Minsky. Right now, there are a few respected proponents of this idea.

We should not think of the crisis as an opportunity for one particular view to be passed, but as an occasion that allows for the discussion of important, but set aside, proposals, for our financial system. I feel very confident that if people read, not just the Chicago Plan itself, but the writings of the authors I’ve mentioned, these ideas would gain more currency.

- Posted by Don the libertarian Democrat

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