June 18, 2009
Is Financial Regulatory Reform Even Necessary?
Posted by David Zaring

There's plenty of punditry out there on the Obama blueprint.  It is not a dramatic reorg of financial regulation - as Joe Nocera observes, "the Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself."

He makes that sound like a bad thing, but our traditions should be abandoned at their peril, and so on.  More, I also agree with Elliott Spitzer, who writes:

Each of the major regulatory steps that the Treasury secretary and the director of the National Economic Council have set forth makes eminent sense. Yet each was already squarely within the purview of an existing federal agency.

Veteran readers of this blog will know that I think that the Depression era statutes guiding the Fed, FDIC, and Treasury have largely permitted the massive interventions into the regulatory system that we have seen so far (the exception, I think, were those bailouts to non-banks, but there the question is whether the language of the Fed's authority, which permitted them, had somehow been qualified by decades of practice, which would not have).  Those statutes are short, old, and have catch-alls that can be interpreted very broadly indeed.  Moreover, federal courts are supposed to defer to agency interpretations of statutory terms, even if those interpretations are novel.  So federal agencies could take phrases like "safety and soundness" and put very new spins on them.

Spitzer made his career exactly this way; he dusted off an old statute in the state of New York, realized it provided for extremely broad basic powers, and used it to go after Wall Street and run for governor.  So it isn't surprising to hear, as he has been saying for a while, that he doesn't see the need for new powers.

Understood this way, what financial regulatory reform really is is an effort to take stock, in a democratic way, of what the regulators should be doing.  By specifying new powers, Congress will be limiting agencies as much as it will be expanding their authority, by indicating what it wants from the system, and what isn't a priority.

So to answer the question at the top of this post, no, in my view, financial regulatory reform isn't really necessary, at least not from a "can we regulate hedge funds? or derivatives? demand they be traded on exchanges?" kind of way (except where Congress explicitly blocked that sort of thing, and to be sure, there are some things for which legislation would be needed, like insurance, abolishing OTS, etc).  Whether you think it has value depends on what you think about a taking stock exercise - and whether you think that Congress or the regulators themselves are best suited to the job of sketching out the next regulatory regime.

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