The recipe for effective regulation

June 17, 2009

There’s no doubt that Barack Obama gives a good speech:

Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction.

One his plan is put in place, Obama says, the Federal Reserve will be held accountable for regulating any firms which pose a systemic risk. Not the Financial Services Oversight Council, which is more of an advisory shop which will help the Fed keep tabs on what’s going on.

This is the good part of the plan, I think: making it hard for regulators to pass the buck or claim that they had no authority to intervene. On the other hand, as we saw with the OTS and AIG, sometimes regulators are just simply out of their depth, and the sheer number of regulatory institutions which is going to exist is so incredibly large that, statistically speaking, it’s inevitable that many if not most of them will end up falling down on the job: I don’t think it’s possible for any country to have more than two or three really effective regulators. (One is hard enough.)

So there might be new authorities, and there might even be new accountability — although accountability will be to Congress, which is a recipe for political infighting rather than transparent benchmarks. But I’m not holding my breath that all this change will actually be particularly effective.

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