Obama’s Elusive Frontier
That’s what administration “officials” are quoted as characterizing the delicate balancing act they’re attempting between the need for a new regulatory structure for the financial services sector and the equally compelling requirement for continued innovation and economic growth. There’s a lot in this. And Obama doesn’t need Congress to get most of these “reforms” through. That can be done via the regulatory structure. But from where we sit, here’s what all this means:
1. Is it really possible, through regulatory reform, to create the stability Obama seeks? To shave off some of the highs in the economic cycles and soften the landing in the lows?
2. Would more stringent capital and liquidity requirements for the systemically critical banks convert these institutions into low-margin, lumbering giants?
3. Is it unreasonable to expect the Fed to perform as now expected even with the greater powers?
4. Is morphing the Fed in this way in conflict with its core role in monetary policy?
We have to admit that when this crisis began we were grateful for the intervention by Paulson and Bernanke. But now we’re wary of systemic solutions seeking to prevent systemic problems. It makes us sound libertarian, which we aren’t, yet the last 110 years of history has shown that concentrating power and responsibility in our system of government and regulation is something to be wary of. Government, when it approaches a problem, largely thinks that the solution means a more powerful government. But that in itself has so often led to the stifling of private initiative. So here’s our thoughts at the right solution:
1. Consumers do need more protection and we whole heartedly support the formation of the Consumer Financial Protection Agency. This is long overdue, especially when it comes to credit card marketing and the fiasco that revolving debt has become over the last 30 years.
2. The stability Obama seeks runs the risk of creating the mediocrity we as a culture abhor. You can’t have reward without a degree of risk. Our concern is that Obama will diminish the spirit of risk taking out of the economy not intentionally but as an unintended consequence.
3. The economy will recover. It always does. When that happens we’ll all look back at these reforms and realize we didn’t need some, or most of them. But it’ll be too late and the arguments over recasting, or repealing them, will go on for decades. Just look at how long it took to change the Glass-Steagall Act.
4. Too much power in the hands of any government entity is just a bad idea. Period.
5. No one yet is saying anything about the phenomenon of large financial institutions going astray when they get too big and become unmanageable. Think AIG and Citigroup. No CEO can possibly manage a company that large and diversified in the financial service sector.
6. As we’ve said in prior posts, every such crisis has a lot to do with behaviors being modeled by management. It’s not the regulatory structure, or the rules, that failed. It’s the people. The judgments they made. The behavior they tolerated around them. We recall the story of an investment banker in the CDO space who said that he knew many of the deals they were doing stunk and that the bank was taking on too much risk. But he did the deal because if he didn’t the competition would. That’s a failure not of the rules but of human judgment. Where are the bankers who would stand up and at the risk of criticism from peers, or loss of confidence from underlings, or even at the cost of their own compensation would say: “I don’t care who does this deal. We’re not going to. It’s not good for the bank.” We need more of that President Obama.
