The Super-Regulator's Task

http://www.futureofcapitalism.com/2009/06/the-super-regulators-task

The Treasury secretary, Timothy Geithner, was up on Capitol Hill today testifying about the Treasury budget, and in his prepared remarks offered a glimpse of the super-regulator:

In the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system. Together, these changes will help prevent another crisis of the magnitude that we have just lived through...

What breathtaking hubris. This super-regulator is suposed to measure and analyze risk more effectively than those actually taking the risks themselves. And it will "prevent another crisis of the magnitude that we have just lived through." Think about the magnitude of the crisis and how it may be measured -- a turnaround from positive about 2% growth to negative about 6% growth, an increase in the unemployment rate from about 5% to 9.4%, a decline of as much as 40% or 50% in the U.S. stock market from which there has already been some significant recovery. Is it really within the power of any human regulator to prevent this? There may be things that regulators, or governments, can do to help soften the landings, though that may run the risk of delaying recovery. But there are so many variables and individual choices and decisions involved that claiming a regulator can prevent such a crisis requires an extraordinary faith in the ability of regulators. What is the regulator supposed to do, outlaw the sale of stock, the closing of factories, or the firing of employees?

When the next severe downturn happens, whatever new regulator is created this time around, you can bet that there will be some commentators out there with an explanation at the ready about how if we only had a better, more powerful regulator, this never would have happened. It's not to say that we can't have better or more effective regulators. But the super-regulator is being held out as a kind of panacea, a cure-all. Skepticism is in order.

by Editor  |  Jun 9, 2009 at 12:51 pm Related Topics:  Capital Markets Regulation receive the latest by email: subscribe to the free futureofcapitalism.com mailing list