Build It, and They Will Come

Mike Konczal over at Rortybomb¹ has weighed in this morning on my reformist manifesto. For the most part, he does not seem to have disagreed with me overmuch, which is either a sign that I am on the right track or that Mike is too much of a gentleman to reveal to the world that I am a hopeless idiot. I prefer to believe the former, despite all evidence to the contrary.

Anyway, he specifically comments on a handful of my proposals. While I do not disagree with the substance of his remarks, I thought it would be useful to respond in this forum with a few clarifications and comments of my own. He repeats my proposals in bold and comments below:

2) Narrow and focus the role of the Federal Reserve…3) Render Fed actions and deliberations transparent.

To me this is an either/or. If the Fed wants to be the systematic risk regulator and use its 13 (3) privileges in an expansive manner going forward, there needs to be a change in the way they are monitored. I understand 13 (3) goes back 70 years, but given that the Fed will use these privileges more aggressively in the future then they need to be monitored in an equally aggressive manner. Removing these regulation powers to outside the Fed (as the Dodd Bill currently proposes), means that there isn’t quite the same need for transparency (though the way appointments are made could stand to be reformed either way).

I think we really agree here. My proposal is to narrow the Fed's mandate to its core responsibility for monetary policy and price stability but add "responsibility for monitoring, controlling, and managing systemic financial risk." If we commission the Fed to act as our overall systemic regulator, as I suggest, of course we should increase legislative oversight of it. It is exactly the sort of non-monetary policy decisions like the Fed made in the case of AIG and others recently that must be examined in retrospect under a clear and searching light. Just reassign the Fed's other responsibilities for consumer protection etc., which it has sadly neglected, to other parties. Monetary policy, as far as I am concerned, can remain largely unexamined and protected from political interference in the deep dark hole where it has resided for decades.

4) Consolidate all banking supervision under one unified national regulator.

Yes. Also this is good for business too – the largest, most connected firms have the ability to regulator shop, while the smaller firms have to deal with overlapping, and often contradictory, regulation signals. This point was one of the community banker’s objections to the CFPA – having multiple regulators is a nightmare for small firms, even more so if you aren’t fundraising for their bosses and can compete them against each other.

Okay, but I do believe an independent CFPA or equivalent should exist for consumer financial protection separate from any unified bank regulator. The major reason for this, as I stated before, is that retail financial products and services are different in kind from institutional financial services, and they should be regulated separately. While there is no reason, I suppose, why a CFPA division could not live within the same walls as a federal bank überregulator, I think it would help clarity, efficiency, and oversight if it were separate.

Perhaps I am oversensitive on this point. My prejudice has been formed by watching the SEC make a hash of combined retail and wholesale regulation of securities markets for decades. Also, whichever agency regulates consumer finance, I believe it should do so both for banking products and services and for securities products and services offered to the average Joe. The barrier between these two delivery channels is far more porous than many realize, and I suspect they will continue to converge in the future. (I am not constitutionally averse to financial innovation which accelerates this convergence, as long as it happens under the eye of one coordinated, watchful regulator.) I guess I could be persuaded on this point, but someone will have to convince me a combined retail and wholesale regulator would not just end up looking like an even more bloated, less effective SEC.

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Lastly (or firstly, in his case), Mike addresses my financial contribution ban/free speech proposal which has garnered a significant amount of attention elsewhere:

1) Ban political campaign contributions by the financial industry.

I think it might be ‘bill of attainder’ territory to just go after the financial industry, and banning all contributions is a free speech issue. I think an easier approach would be a simple “No contributions from firms regulated by the committees politicians serve on” rule. No financial industry contributions to those who sit on the Financial Services Committee, no energy contributions to those who sit on the Energy and Commerce Committee. I’m not sure if it would survive a legal challenge, but that seems fair in a way that might convince a lot of people – referees can only be taken out to dinner by teams that they don’t ref for – and it may also provide real incentives for those with some integrity to sit on the most hot-button issue committees while those who just want to cash out their representative position will all rush to the Bird Watching Committee or whatever.

Though that might just be me with diminished expectations – Lawrence Lessig is able to start convincing Richard Epstein on campaign finance, so maybe there’s room for a giant liberaltarian movement here.

I like his refinement of my blunt proposal, and I am sensitive to the free speech issues which such a ban entails. Surely whatever is done in this area will face severe legal challenge, but I truly believe it is worth pursuing. As I have written elsewhere, I believe that our system of financial regulation has been compromised not only by the obvious method of regulatory capture but also by legislative or "complete inside-the-Beltway capture." The nexus and vector for the latter, obviously, is money, and we need to figure out a way to change this.

Related reading:
Rortybomb: ED’s New Site: The New Decembrist (December 8, 2009)
TND: A Reformist Manifesto (December 5, 2009)
TND: Put a Sock in It (December 7, 2009)
TED: A Mighty Wind (June 18, 2009)

¹ Mike, I'm dying to ask: what does "Rortybomb" mean? Tell us, pretty please?