Where bank regulation is headed
I like Taunter’s idea of splitting the financial services industry into highly-regulated Boring and largely-unregulated Exciting parts, and making it very clear that the Exciting bits could never get bailed out by the federal government. I disagree however with this:
While I could easily be convinced to give Inside or Outside responsibilities to other agencies, the one agency that cannot get either responsibility is the Fed. Indeed, one of the main goals of reform should be to strip any sort of oversight responsibility from the Fed.
The big thing missing from Taunter’s utopia is any kind of macro-prudential regulation — which is exactly what the Fed is perfectly placed to do. You can’t regulate the financial system on a case-by-case, institution-by-institution basis: sometimes you need to look at the big picture — including keeping an eye on what all those Exciting companies are doing. Let’s have the Fed do that, at least.
Regulators should also be asking more questions of market participants — the kind of people who were first to realize that AIG was in trouble. Lloyd Blankfein is right about this:
We should get more questions from regulators like, “Where are standards slipping or policies being stretched? Where are pressures building up? And, where are you seeing concentrations in risk?”
It’s in everybody’s interest for banks to be very open about these things with their regulators. After all, as Jeff Cane points out, Goldman itself was essentially bailed out by the government: were it not for massive government intervention in the financial markets last year, Goldman would not exist today. At some point, banks don’t benefit when competitors fail: instead, they themselves get hit as well.
It’s also worth noting that Blankfein admits that the finance industry “let the growth and complexity in new instruments outstrip their economic and social utility as well as the operational capacity to manage them”; he also says that guaranteed bonuses “are bad for the long-term interests of our industry and the financial system”. There’s definitely a pretty large degree of consensus forming now, and Blankfein’s speech gives a good idea of where we’re probably headed. Nothing too radical — certainly nothing along Taunter’s lines — but it’s still better than nothing.