How Regulatory Reforms Will Affect Consumers (Cont.)

Paul Solman: Last week, we featured a number of economists (and a journalist) responding to the new financial regulations proposed by the Obama administration. But no economic historians were among them. We’ve remedied that omission by asking Eugene White of Rutgers, who sparred with Amity Schlaes over the New Deal some months ago on the NewsHour, to weigh in. Here’s what he sent us. (Conservative jurist and author Richard Posner also has an interesting critique in today’s New York Times.)

Eugene White: While the Obama’s administration has offered what appears to be a broad reform of the financial system, it falls short of what is desperately needed. What has been proposed is a patchwork of changes designed to meet some the urgent problems that arose during the financial meltdown. But what is required to prevent future crises is a comprehensive redesign of the regulatory system to ensure its soundness and efficiency.

With an alphabet soup of federal and state agencies exercising overlapping and imperfect authority, the current system can be viewed as an aging plumbing system of Rube Goldberg complexity. There are leaks and many of the pipes and valves are stressed. Fixing a few parts may appear to improve it, but it may create pressures elsewhere that will yield yet another spectacular explosion.

The most obvious, but far from the only, unaddressed problem is the number of agencies. Critics attack the excessive number because of regulatory arbitrage—-financial institutions shop for the most lax regulator. A much bigger problem is that each agency has its own mission and those missions can conflict quite seriously. The Fed or the OCC wants banks to increase their loan loss reserves to protect against future defaults, but the SEC is worried that greater reserves can be used to smooth earnings and hide the true condition of banks. Adding a new consumer protection agency will exacerbate this problem.

Rather than rush through some proposals and hope that Congress will not tamper with them according to the dictates of special interests, a much better idea would be to delegate the task of drawing up a blueprint for a new financial system to an independent National Financial Commission. Such an approach would provide greater transparency and reduce lobbying that has too often hampered reform in the past. The one time this was tried, after the panic of 1907, it was a success — the creation of the Federal Reserve.