Why effective regulatory overhaul is hard

By Felix Salmon
June 12, 2009

Tyler Cowen has a good post on why it might not be such a bad thing after all that the coming regulatory overhaul isn’t going to be nearly as big or comprehensive as many of us originally hoped.

Tyler’s best points, I think, are that (a) the Department of Homeland Security is living proof that regulatory consolidation is not necessarily going to be a great success; that (b) “box reshuffling” can be a distraction from “substantive goals of mission”; and that (c) a lot of the real obstacles to effective regulation are actually Congressional, rather than being endemic to the current structure.

Still, the current regulators have clearly failed at their jobs, there’s no reason for entities like the OCC and the OTS to continue to exist, and it’s worth remembering at all times that the number of large American financial-services companies with intelligent and sophisticated and effective regulation is, currently, zero.

There’s actually a case to be made that the biggest weakness of the Gramm-Leach-Bliley act was not that it allowed commercial banks to buy investment banks, but that it created no regulatory oversight commensurate with the systemic importance of the beasts that it spawned. It’s high time that oversight was rectified — with extreme prejudice.


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I believe the real reason a regulatory overhaul will fail is that the regulators are too close to the companies they regulate. When the top posts are filled by ex-executives of Goldman and the likes, why would they quash the profiteering of their former employers. Without them, they wouldn’t have landed their cushy DC jobs.

Posted by greg | Report as abusive

We continuously overhaul our intelligence services to no avail. If we start down that road with finance, we’ll find ourselves deeper in messes because bureaucracies don’t get along. Better to have focused groups that work on their niches and then have a higher level group or organization with the responsibility for looking across boundaries. The sad but inevitable truth is these things get too big and complex.

Posted by jonathan | Report as abusive

Folding the OTS gradually into the OCC would make the most sense, given that IndyMac and WaMU no longer exist that is 2 large thrifts that no longer exist.

Filling top posts with Goldman guys has very little to do with the bank examiners on the ground. I highly doubt there is a rush of ex-bankers just waiting to rush out to visit Tulsa in august for a regulatory review. Geithner may be the point man, but it’s up to the regional directors at OCC, etc, to do their jobs.

Posted by Griff | Report as abusive

If the OTS and/or the OCC are abolished, one might wonder what would happen to the thousands of employees and examiners that work for those agencies, would they be transferred to other agencies or simply gifted back to the job market.

Posted by Brian Martin | Report as abusive