Tyler Cowen makes the case for making the Fed the systemic regulator:
Assuming we are going to do it, I think it has to be the Fed, whether we like it or not. It's the Fed who is the fireman with the awesome power to print money, move markets, lend to the banking system on a large scale, and now even conduct fiscal policy, all without Congressional approval. Our textbooks speak of the Fed as a lender of last resort but very often it is the lender of first resort too.
If you stuck another agency into that mix, it would end up waiting for the Fed's go-ahead, once an actual crisis arrived.
OK, so the systemic regulator is the Fed. But then you can't make the systemic regulator too accountable to Congress without eliminating the quasi-independence of the central bank. There's not any comfortable point on the power-accountability continuum, mostly because we don't trust Congress to run monetary policy.
The stinger on the tail is this: we want the Fed to deliver low inflation. That means we let it be influenced by financial creditor interest groups but not so much by populist interest groups (Adam Posen had a good piece on this but I cannot recall the reference). Right now a lot of people are asking for more populist regulation without realizing that also requires more populist monetary policy.
I think systemic resolution is important, and it certainly wouldn't hurt to keep an eye on systemic risk. But Tyler is probably right that we cannot get the financial regulation we want until we decide what we want: low inflation, low interest rates, and broad credit availability; or low risk and low profits in the banking sector.
I'm also generally skeptical that we're going to achieve the implied goal of making sure that financial crises never happen. If anyone, including congressmen or regulators, had believed that there was a reasonable risk of the financial crisis we just experienced, it never would have happened. That's what you have to fight, not some perceived imperfections in the regulatory structure.
Hey Megan. Sorry for the threadjacking. This is my last post in Asymmetrical Information anyway, so rest assured it won't happen again.
I assume you're not going to issue any correction about the abject Krugman post, and just let visitors continue to read that quote out of context.
This is too much politics, and too little integrity, for me to continue to read a blog that is supposedly about Economics first and foremost. I suppose an honest libertarian is hard to find. Cato at Libery, Marginal Revolution and Will Wilkinson will have to do for the moment.
I couldn't help reading some comments in the Krugman thread that, after presumably reading the article where you took the quote from, still thought that Krugman was calling for a housing bubble. It seems any blog gets the readership it deserves. I guess over time you can expect a increasing share of obtuse readers and commenters.
Enjoy them.
^Bill O'Reilly and Sean Hannity, saint's they are, would rip the integrity outta that guy's rear end!
Heh. You should move to Canada. You can call the Human Rights Commission if someone insults your god.
Derek
"You can call the Human Rights Commission if someone insults your god"? What a sad attempt at humor.
Although Jaspel's got a point, I think she (it's a she) overreacted. But Derek and Duder rushed to give an impressive demo on the "obtuse commenters" part. What a bunch of cretins.
I was actually joking. I find Ms. McCardle's reading a bit questionable. Not that I'm not obtuse mind you. My wife could tell you that.
Ops.... I guess the joke's on me.
Thank God for Derek.
"If anyone, including congressmen or regulators, believed that there was a reasonable risk of the financial crisis"
Everybody knew or should have known of the risk, what they didn't know and didn't cope with was when the crisis would occur. Individuals entered mortgages they would not be able to afford because they though they'd have time to refinance. Lenders created them because they thought they could sell them off before they became uncollectable. Politicains and their regulators didn't want to shake up the next election and take responsibility for slowing an overheated economy.
"We had no way to expect this" is a lie, people just didn't expect it while their money was still in the game.
If anyone, including congressmen or regulators, had believed that there was a reasonable risk of the financial crisis we just experienced, it never would have happened. That's what you have to fight, not some perceived imperfections in the regulatory structure.
I don't see it that way, Megan. People respond to incentives, and as long as one's direct incentives to do something overwhelm both contrary incentives and any personal inhibitions, they will respond accordingly. The loose money policy created huge incentives for fraud and risk-taking, which overwhelmed the system's controls and--most importantly--the personal inhibitions of many a banker, regulator and congressperson to stand in the gap and put a stop to it. Don't expect people to rise to the occasion. Just make sure the proper incentives are in place.
> If anyone, including congressmen or regulators, had believed that there was a reasonable risk of the financial crisis we just experienced, it never would have happened.
And that is why Congress is borrowing vast sums from overseas. And contemplating a single payer medical system. Etc.
I think you are being far too charitable.
Derek
I'm skeptical of an unelected regulator being able to stand up against the freight train of public opinion during a bubble. Imagine the opprobrium that would be heaped upon the anonymous official who warned that we need to stop making mortgages affordable to poor people in 2005?
Or the accounting agency who said we need to expense options as part of GAAP in 1998. Oh yeah, that was tried. There were marching bands out to protest the FAS' decision on that one.
Well said Publius.
I'm concerned about the unforeseeable catastrophe the regulator will cause. Who will bail out that "too big to fail" institution? Oh yeah...us.
I trust the market more than any regulator. It works faster. It knocked Enron out of the box before any regulator had a clue what happened. It did the same with the latest round of toxic assets. It wasn't perfect. It didn't price those assets correctly at inception, but still got it right far quicker than any regulator. Regulators still don't know what happened.
The market was teaching some imprudent people a valuable lesson. We shouldn't have interrupted it. Rather, we're laying the moral hazard traps for the next round of imprudent people to step in.
On the plus side: the Fed has great institutional credibility and independence developed over many decades.
This is an awesome quote--awesome for its total establishmentarian naiveté. By what standard is the Fed "independent"? Because it says so? It has been demonstrated over and over that it's anything but:
http://www.independent.org/publications/article.asp?id=171
And "institutional credibility"? I'm not even exactly sure what that means. Credible among other institutions? Credible because it's an institution? I suspect you mean something like credible in its capacity as an institution to meet a specific mandate (stable price level, maximum employment, etc.). Yeah, what a raging success.
Back in the days of Fed-watching, we used to say that the Fed was as independent as, say, Czechoslovakia. Come to think of it, the quote is unintentionally apt.
I tend to view financial bubbles and crises as big impersonal processes that we can't really do much to influence, much like the weather. So I suppose we could also have a regulator tasked with reducing the risk of severe weather, but I expect the result will just be more people who think they won't need their umbrellas..
I suppose we could also have a regulator tasked with reducing the risk of severe weather, but I expect the result will just be more people who think they won't need their umbrellas..
See Army Corp of Engineers and Hurricane Katrina