Revolution and Reform

[This post originally appeared at The Baseline Scenario on December 7, 2009. It is reproduced here in its entirety with the kind permission of the author.]

Many of us bloggers are better at criticizing than at proposing anything — especially when the world makes it so easy to be a critic. The Epicurean Dealmaker, who has sent the occasional volley of criticism my way (I’m not linking to examples because my ego is too fragile), recently decided to deal with this head-on and wrote a “reformist manifesto,” complete with an epigraph from The Communist Manifesto, with a list of specific proposals.

Basically these include cleaning up the regulatory structure, expanding the scope of regulation (consumer protection, hedge funds), moving “virtually all” OTC derivatives onto exchanges or clearinghouses (I believe that “virtually all” means the currently-proposed exemption for “end-user” hedges would be drastically reduced), and increasing Fed transparency. There is also this one: “Ban political campaign contributions by the financial industry.” I think that would be great, although there is at least one constitutional problem and possibly two there.

There’s nothing on the list that I disagree with.

However — and there’s always a however — I worry that it won’t be enough. TED consciously leaves the details to what he hopes will be “strong, competent, and well-informed regulators.” Several of his proposals, such as rationalizing Congressional oversight (to eliminate the current situation where the industry can arbitrage between the Senate Agriculture and Banking Committees), should help mitigate the problem of political interference and regulatory capture, but will it be enough? After all, George Stigler’s paper on regulatory capture wasn’t about the financial sector in particular — it was about all regulation, all the time.

In a sense, this comes down to whether you place more faith in Congress or in regulatory agencies. I know defending Congress is a tough sell these days, but for example they did pass something called the Clean Air Act about forty years ago. And when, under the Bush administration, the EPA decided that greenhouse gas emissions didn’t fall under the Clean Air Act, the Supreme Court told the EPA it had to enforce the law. That said, there is also a famous 1984 case in which the Court said that in general regulatory agencies were free to interpret statutes how they choose, so this is not a black-and-white topic.

As far as what I would do instead or in addition, I lean toward Simon and Peter’s earlier post, although Simon and I have had some discussion of the details since then.

You’ll note that TED’s post is not on his personal site, but on The New Decembrists, a new site where he hopes to aggregate discussion regulatory reform in particular. (Bonus points for the historical reference, although that’s nothing new for TED.)

By James Kwak