Bankers, politicians, and economists have taken to dreaming of a super-regulator as if it were a super-model. The latest example is an article posted last night on the Web site of the Financial Times by the president of the Securities Industry and Financial Markets Association, Tim Ryan.
we have endorsed the creation of a single financial markets stability supervisor, a central authority with oversight in all markets and of all systemically important market participants – regardless of charter, function or unregulated status. This stability supervisor must be given sufficient resources to collect data across markets and the ability to use it to take swift corrective action to prevent systemic instability. Never again should the failure of one or a handful of firms be allowed to threaten the viability of our economic system.
The article goes on to say that the association "has supported the need for regulatory reform of derivatives" and that "we firmly believe that there have been excesses on the compensation front." (We'll know they are serious if and when the recipients of the excessive compensation return the money.)
This fantasy of a super-regulator has to be just that, a fantasy. If "all markets" means markets in everything, everywhere, a central authority to oversee it all would require superhuman, supergovernmental, supernatural power. Merely collecting all this information would be an overwhelming task, let alone analyzing it and deciding when to act on it. Nor is it clear what this super-regulator's mandate would be. The statement that "Never again should the failure of one or a handful of firms be allowed to threaten the viability of our economic system" could be read to say that no big firm should ever again be allowed to fail. Or it could be read to say that the regulator should be empowered to act to cushion the blow of such a firm's failure. Or it could be read to say that no firm should be allowed to become big enough that its failure would have grave repercussions.
As for the red herring that a firm's failure threatened "the viability of our economic system," it's not really clear that what threatened the viability of our economic system is the failure of a firm or two but the political class's overreaction to such failures or potential failures.
It is interesting that the Securities Industry and Financial Markets Association is making such a statement. Its members are quite a list, including three entities that are part of AIG, which is essentially controlled by the U.S. government, meaning the government is in the awkward position of telling itself what to do. Another member is Standard & Poor's, whose ratings on mortgage-backed securities have been faulted for helping contribute to the crisis. Another member is Pimco, which profited at the expense of Fannie Mae shareholders and, arguably, a lot of the rest of the economy when the federal government seized Fannie Mae and guaranteed Fannie Mae bonds, many of which were held by Pimco funds.
Other commentators see other roles for regulators. The New York Times had an editorial Sunday calling for more regulation of "customized derivatives" so that "customers who rely on derivatives — including investment funds, major corporations and wealthy individuals" don't have to pay the fees charged by banks, which the Times finds to be higher than necessary. It is interesting to see the Times editorialists standing up for "major corporations and wealthy individuals." The Times just raised its weekday newsstand price in New York to $2, which some non-wealthy individuals doubtless find a bit steep. But those individuals, rather than calling for more regulation of newspaper prices, may instead simply stop purchasing the product, and get their news elsewhere. The mere existence of a what seems like too high a price does not always mean that there needs to be more regulation.
In his latest weekly column, my friend David Warsh reports on a call for an "independent Capital Markets Safety Board" modeled on the National Transportation Safety Board that investigates plane crashes. It "would pay its career staffers Wall Street salaries in order to avoid the temptations of the revolving door, and send them in any time a financial entity's collapse threatened the stability of the system." The thing about Wall Street salaries, though, is that they carry with them the risk of job loss, and they vary depending on performance. Judging the performance of a regulator is a trickier task, because the task assigned to the regulators is rarely well-defined. Some commentators seem to want regulators who will make sure that the stock market never goes down, that big companies never fail, that GDP growth never goes negative and that unemployment never rises. No regulator can eliminate all risk, and it would be foolish to try. But that, in one way or another, is what most of these proposals for super-regulators are about.
Could we have more capable regulators and better-designed regulatory agencies? Maybe. But the "stability" that is an-oft-stated goal of the super-regulator fantasy is not necessarily consistent with free markets, which are volatile. The calls for better regulators often seem like a way for market participants to sidestep responsibility for their own roles and to pretend that the creative destruction that is part of capitalism can somehow be eliminated.