Regulation as will and idea

June 18, 2009

It is somewhat strange that a disgraced elected official has now repositioned himself as an expert commentator on financial regulation, but that is exactly what Eliot Spitzer, the former New York governor, has done.  His most compelling article for Slate to date is a critical look at the Obama administration’s proposed financial overhaul.

Regulators failed in the financial crisis not because they lacked the proper tools, Spitzer says,  but because they lacked the “will to use existing power.” 

Who knows better about will than Spitzer? As New York atttorney general, he dusted off a 1921 state law, the Martin Act, and used it as cudgel to force changes on Wall Street.   Yet Spitzer also contends that reducing regulatory oversight simply to a question of new laws may condemn us to repeating history when the next financial crisis hits. If regulators allow their hands to be tied because of ideology or because of the immense influence of the financial industry, new powers won’t matter.  As he writes:

Washington loves to pass new laws conferring additional power whenever there is a major mishap or crisis. Doing so implicitly confers immunity on those who were in power at the beginning of the crisis by sending the following message: The appropriate authorities did not have the power to forestall this problem. But now that we have granted new powers to these authorities, they will avert the next crisis. The problem with this grant of immunity is that we then fail to ask why no one used the power they had and whether rigid ideological thinking got us into the crisis in the first place.

David Zaring on the Conglomerate blog agrees with Spitzer, saying that the act of passing new laws  “really is is an effort to take stock, in a democratic way, of what the regulators should be doing.  By specifying new powers, Congress will be limiting agencies as much as it will be expanding their authority, by indicating what it wants from the system, and what isn’t a priority.”

If government had these powers before, did it fail because of a pro-Wall Street bias or because the wrong people were in charge? (Step foward, Chris Cox)  The questions raised by Spitzer need to be answered first before the debate on an overhaul should begin.

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