According to press reports (Wall Street Journal, Washington Post), the Obama Administration is backing away from earlier plans to create a super-financial regulator. The Post story notes that "The plan now taking form would include the creation of a council to work with the Fed to coordinate oversight of the financial system."
Good. As I noted some time ago, I am very skeptical of the Department of Everything Department approach to financial regulation. I think we went down that path with the Department of Homeland Security -- which was an industrial age response to an information age threat.
Rather than create a new hierarchical structure, we need to empower the network. True, financial regulators don't always play well together -- and financial institutions have been known to "regulator shop" to get the most lenient oversight. But both of those problems can be handled by how you design the network -- the roles, the structure, the rules.
So I am heartened by the idea of a council. I agree with Dan Tarullo's recent statement (Financial Regulation in the Wake of the Crisis) that:
History shows that opportunities for real reform are often short-lived. Momentum can too easily be lost, and the return of better times too easily leads to complacency. If we are to spare the next generation the pain and loss caused by a financial crisis, we must not only learn lessons. We must act on them.I would submit that one of those lessons is that structure matters as well as regulations.
So I would urge the Administration and the Congress to put as much thought into the set up of that organization as they do to the actual substance of the new regulations. We can't create regulations to foresee every situation. We can, however, set up a structure that can respond quickly. Ultimately, organization is what matters. Let's get the organization right.
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