More details on financial regulation overhaul

In a posting last week, I noted that according to preliminary reports, the Obama Administration was not going to propose a super-regulator to oversee the financial system. That did not sit well with some in Congress. But, as I argued, I think it is better to utilize a collaborative network model, rather than the traditional hierarchical bureaucracy.

On Wednesday, the President will formally release the proposal. But already the outline is being reported. For example, today's Washington Post has an op-ed by Tim Geithner and Larry Summers (A New Financial Foundation) giving the highlights of the proposal. The Wall Street Journal has a more in-depth story on the proposal. That story confirms the more networked approach:

Officials say the goal is to distribute power in such a way that gaps in oversight are removed and the opportunities for regulator shopping reduced.
. . .
The plan calls on the Fed to oversee financial institutions, products, or practices that could pose a systemic risk to the economy. It will create a "council" of regulators to monitor this area as well.

The proposal will also seek to the jurisdictional issues between the SEC and the CFTC and will even create a new consumer financial protection agency.

I realize there will be a lot of skepticism about this approach. Already Business Week is running a story Is Obama Flubbing the Financial Fix? But ultimately the network model should be more effective. As I mentioned before, the trick will be designing the incentives and process to make it work in practice - not just on paper. I hope Congress and the regulators spend enough time on that part of the proposal to get it right.