Breakingviews in the New York Times Wednesday mulls over the debate surrounding a single versus multiple bank regulators. The column wanders through the various positives and negatives and offers up a number of possibilities, including a flock of functional regulators, a systemic regulator and having the government decide who gets to regulate what. Breakingviews thinks information sharing is good and would like to see the government "keep some skin in the game" by limiting the amount of bailout money regulators have access to. This latter suggestion is odd, only in that regulatory incentives do not necessarily act like private market incentives. The greatest incentive for a regulator is to avoid being called before Congress and humiliated; and in this crisis, even that threat didn't hold back the flood.
Generally, however, Breakingviews doesn't seem to be terribly convinced that either the single or multiple regulator stands out as clearly superior, though it leans toward the latter, offering the stirring recommendation: "Nonetheless, having different and functional regulators could be healthy, if done right." Ah, the fly in the ointment: if done right.
The real problem with this sputtering debate is that no one seems to want to define what we're curing. Try this. If you believe the real problem here involved cases of malfeasance and corruption slipping through the net (the investigative or Madoffian diagnosis), you're probably going to focus on eliminating regulatory arbitrage and on creating redundancies that insure that what one regulator misses, another might catch. That's the multiple or functional regulatory approach. If you believe, however, that the real problem was systemic complexity -- that a bank overseer in California, for instance, might never be able to comprehend the importance of credit default swaps in London -- then you'd attempt to provide a unitary regulator with good information sharing. If you blame criminality, ala Bernie Madoff, you'd lean to multiple cops; if you blame the system, derivatives, globalization or innovation, you'd be hot for a systemic overseer.
But there's a third possibility that neither bureaucratic structure really deals with -- making the debate in Congress over this seem willfully ignorant. That's the cancer of regulatory capture. If you believe that much of the regulatory, political and financial system were effectively gulled into lassitude by big profits, a free-market ideology and sheer passivity in the face of a bubble, then the underlying structure doesn't matter all that much. (This, by the way, is not as extreme a view as Simon Johnson's notion of a financial oligarchy, which really requires a coup to break the conspiracy.) In fact, all regulators (including informal ones like the media and the markets) seemed to miss something, whether large or small. There was a general and powerful consensus that times were good and that markets were self-correcting. No one should forget the power of that consensus, but, alas, Congress seems already to have put it aside.
Indeed, the very fact that we're debating this second-order institutional matter is a sign of how we are avoiding the serious underlying issues. The fact is our regulatory system suffers from all three ailments -- though the first two are less significant than the reality of capture. For Congress to wrestle with the capture problem, it would have to honestly deal with its own complicity in the crisis and the way politics shapes finance, and finance shapes politics. The Wall Street Journal Wednesday offers the classic validation of this capture process that occurred not before, but after, the crisis began with the Lehman Brothers Holdings Inc. collapse. The paper dug deeply into the fierce lobbying and congressional bullying that occurred over reforming mark-to-market rules and resulted in changes favorable to the banks by the Financial Accounting Standards Board. Like a lot of lobbying stories, it's hard to find a smoking gun. But it does powerfully suggest how susceptible Congress remains to the bank lobby (or how eager it is for an easy solution to our woes) and how exposed a group like FASB is to congressional entreaties.
The question you're always left with after these lobbying stories is: What are you going to do, eliminate lobbying altogether? OK, maybe you can tighten rules and limit campaign contributions (yeah right), but this remains a democracy, and for all its seaminess, lobbying remains a legitimate vehicle of political expression. The fact is, the deeper problem of capture exactly parallels the deep flaw in shareholder-centric governance: Effective oversight in the long run is only as good as the ultimate overseers themselves. In this case, that means the public and its representatives in Washington. - Robert Teitelman
See Breakingviews story via The New York Times
See related story from The Wall Street Journal
Robert Teitelman is the editor in chief of The Deal.
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