Regulatory reform: The pessimism panel
I enjoyed the discussion last night about financial regulation between Joe Stiglitz, Jesse Eisinger, and Roberta Karmel.
Stiglitz and Eisinger, especially, were on form. Stiglitz has an interesting and rather international take, having chaired a panel with a typically long UN name: the Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System. And Eisinger seems to be getting increasingly curmudgeonly — a very good thing too, in this world of ultra-short memory spans and massive releveraging.
Stiglitz is a fan of the Polish framework. Poland, he says, has one overall regulator, which then has separate commissions with solid institutional knowledge for each of the areas, like insurance and banking, which need to be regulated. He also like the way that the Poles index the salary of the regulator to salaries in the financial sector. Financial-sector salaries are taxed at a set percentage to fund the regulator’s salary, ensuring that the regulator’s salary keeps up with financial-sector wage inflation.
He’s not a fan of the Fed, however, and had a good one-liner:
The Fed had more powers than it used before the crisis. Saying that we’re going to give them even more powers not to use doesn’t seem to me to solve the problem.
Eisinger, too, had his share of one-liners:
It’s a question of regulatory will to regulate. We had a problem not of deregulation but unregulation: we had somebody like Harvey Pitt, who had an attitude of being against regulation; we had Chris Cox who, as far as I can tell, had an attitude of pro sleep. All the structure in the world can’t really remedy these problems.
Stiglitz agreed. “The problem of regulatory capture is persistent and real,” he said, adding that one way to address the problem is to move to a rules-based rather than a principles-based system, hardwiring the regulatory system and giving the regulator less leeway.
Stiglitz’s most contentious view is probably the idea that the entire financial bailout was unnecessary:
We’ve really extended the safety net beyond to big to fail, and my view is that there’s been no convincing argument that any of this was ever needed. It was based on the notion of fear — that if you didn’t do it, the whole financial set of markets would fail. Economics would have suggested that if you did a debt to equity conversion, converting long-term debt into equity, the financial institution would be well capitalized, there would be no reason to panic, and there would be more confidence in the market. But those who saw an opportunity to use scare tactics to get what they wanted did use those scare tactics, and it worked.
Eisinger largely agreed:
There’s a crystallizing conventional wisdom, certainly out of Washington, that it worked. It was ad hoc, it was messy, it was poorly planned, but in the end all this fumbling from Bernanke and Geithner and Paulson ended up working. The evidence for this is that the stock market is up: people have this idea that the stock market represents the economy. That’s a very dangerous consensus forming, because the regulatory reforms do really nothing to address too big to fail. If everybody’s thinking that these gifts to Wall Street banks really got us out of the crisis, then it’s not really hopeful that they’ll address this in any serious way.
Jesse asked Joe whether he thought there was more systemic risk now than there was a year ago. “Yes,” said Joe, “very much so. Things are much worse now than they were a year ago. Structurally things are worse.”
If there was a problem with the panel, it was that the lefty pessimism of Stiglitz and Eisinger wasn’t really counterbalanced at all by anybody more constructive about what had happened. But that’s fine by me: my feeling is that we need all the lefty pessimism we can get right now. It’s our only hope at substantive regulatory reform