THE 88-page report issued by the Treasury Department last week proposes far-reaching changes in financial regulation. Unfortunately, the report is premature, overambitious and obsessed with reorganization. It is also afflicted by Roosevelt envy.
It is natural for a new president, taking office during an economic crisis, to want to emulate the extraordinary accomplishments of Franklin D. Roosevelt’s first months. Within what seemed the blink of an eye, the banking crisis was resolved, millions were hired into public-works jobs and economic output rose sharply. But that was 76 years ago, and the federal government has since grown fat and constipated. The program set forth in the new Treasury report, heavy on structural change, could take decades to put into effect.
The report is premature because there hasn’t been time to study causes of the current crisis in depth — and until these causes are determined we won’t know how to prevent a recurrence. We need some counterpart to the 9/11 commission’s investigation of a previous unforeseen disaster.
The causal account in the report is radically incomplete. It ignores the elephant in the room: the regulators, including the Federal Reserve and the Securities and Exchange Commission, were asleep at the switch, oblivious to the housing bubble and the rapid deterioration of the finance industry. When suddenly awakened by the financial crash, they reacted with spasmodic improvisations that sapped business and public confidence.
The report is scathing about the financial incontinence of bankers and consumers but complacent about regulatory failures. It suggests that these failures can be cured bureaucratically by creating a consumer financial protection agency, a national bank supervisor and a council of regulators, and by giving the Federal Reserve discretionary authority over the entire financial sector.
Politicians are instinctively drawn to plans for government reorganization, because such plans are cheap and visible and dramatic. But planning is the easy part; execution is where the American government falls down. Adding bureaucratic layers will not cure the pathologies of regulation, which are rooted in our regulatory culture — the timidity of civil servants, the contamination of public administration by politics and interest groups, and the power of the “office consensus†to marginalize independent thinkers for not being team players.
Continue reading… judge Richard A. Posner.
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