1 Boring Old Man

Goals Shift For Reform Of Financial Regulation
Anticipating Resistance, Obama Changes Tack
By David Cho, Binyamin Appelbaum and Zachary A. Goldfarb
Washington Post
June 10, 2009

The Obama administration is pulling back from some of its most ambitious ideas for overhauling the financial system, after determining that the consolidation of power under fewer federal agencies would face grave opposition by lawmakers and regulators, sources familiar with the discussions said.

Although the unveiling of the plan is a week away, several central elements have already been pummeled in public by lawmakers, wary of the concentration of authority in few hands, and in private by some economists and financial executives consulted by senior officials.

The administration had originally sought to eliminate turf wars among agencies and gaps in their oversight, for instance by centralizing the power to oversee banks in one body and combining the two agencies that police financial markets.

Those proposals have fallen by the wayside, the sources said. Instead the administration increasingly is focused on adding new layers of regulation on top of old. Officials are planning to empower the Federal Reserve with new powers to manage risk across the financial markets, but are considering setting up a council of regulators to keep the central bank in check.

The plan’s evolution reflects the administration’s revised judgment that some changes, while desirable, do not get at the causes of the financial crisis, while other elements, such as the elimination of entire agencies, would be rejected on Capitol Hill. What remains, however, would still be the most sweeping overhaul of financial regulation since the Great Depression.

The administration’s proposal reflects its wide range of consultations, which may improve the chances that significant reforms will pass Congress. But as a result, the plan increasingly diverges in key respects from what senior administration officials say is the ideal approach to improving financial regulation…

In the coming plan, there are only two important issues from where I sit [knowing as little as I do about all of this]. First, the S.E.C. and the C.F.T.C. have to start doing their jobs again – a bold concept after the torpor of the Bush era. Second, the gigantic hole ["the Wendy and Phil Gramm hole"] of unregulated commodities and derivatives needs to be plugged with full regulatory oversight. It almost doesn’t matter what structures are tasked with resolving these problems – what matters is that they are full staffed, fully funded, and have great big "teeth."

Meanwhile, Paul Krugman is wandering around Europe worrying that we haven’t done enough Stimulus to bring drama to the recovery. In my way of thinking, Krugman is a Keynesian who sees the economy as an organism, kind of like a plant in a greenhouse – needing to be carefully pruned. The opposite view comes from the Conservative free-market Capitalists who see it more like a glorious weed – growing like Kudzu on a Georgia country roadside. I’m coming to believe that Capitalism works best when the main forces at work are the traditional supply/demand dynamics of classical economic theory. The main purpose of "regulation" is to keep the economy operating on that axis rather than being determined by the wheelings and dealings of professional investors or the whims of government. So, I guess I’m a pro-supply/demand capitalist. What that means is that I see Krugman’s gloomy forecasts as the post-deregulation reality that we must live through in order to restore a rational and honest economy. Like that great economist Mikhail Gorbachev said:

 [Gorbachev] said that it was now clear to him "that the new Western model was an illusion that benefited chiefly the very rich. The model that emerged during the final decades of the 20th century has turned out to be unsustainable," Gorbachev wrote in an op-ed piece in The Washington Post. "It was based on a drive for super-profits and hyper-consumption for a few, on unrestrained exploitation of resources, and on social and environmental irresponsibility."