Tuesday, April 1, 2008

Give It All to the Fed

For the past several days, Treasury Secretary Paulson had been previewing his plan to revamp financial services regulation.

Monday, it formally went public.

Little of the Paulson plan helps today’s problems or the families stuck with a bad mortgage and facing mounting payments or falling property values. Those will need another plan. But, he moves in the right direction, just not far enough, if you are trying to fix systemic problems.

The Secretary’s ideas also are not new, many have been discussed before. But the recent Wall Street/subprime meltdown created a new urgency, audience and demand for such changes, most of which require congressional approval.

Never forget that the flawed SEC/FDIC/OTS/NCUA/OFHEO/CoC/Fed financial services regulatory mélange that we have today mainly is the result of the individual industries convincing Congress that each deserves its own distinct regulator and the financial industries getting their way.

Congress has reaffirmed those institutional regulatory delineations time and time again. Those same regulated financial interests will weigh in again on Paulson’s plan and related ideas. Let’s see if history has made them any less selfish, now that Paulson has spoken.

Forget about anything happening in this even numbered year, especially with the quadrennial electoral bash coming in November. This issue will be a matter for a new Administration and those running Capitol Hill in 2009 to hash out.

All financial institutions--from the local credit union, through the GSEs, insurance companies, investment and commercial banks, and hedge funds--do the same thing. They borrow money at one rate, invest it at a higher one, and work like hell to maintain as much of that positive margin as possible.

And while they go about some of their business differently, the goal of financial regulatory standardization and uniformity—and whatever desire there still is for unique pockets of “industry understanding and knowledge”—can be accommodated by a single regulatory agency, with various subunits.

My thinking is to give it all to the Fed (which might fight taking it, but that’s for another blog).

One single financial regulatory agency, with deputy directors (or whatever you want to call them) to coordinate the necessary disparate industry oversight and operating rules, would be sufficient, as long as the Fed Chairman (and monetary policy) are perched at the top.

But would the Fed on steroids still be “The Fed,” meaning the all powerful, acknowledged ultimate financial voice in town, if it monetary policy authority was deemed to be diluted, by other weighty responsibilities?

Would it lose any of its aura and elan?

Great minds can disagree, but at the end of the day, if you can “print money,” you have the power. If the Fed Chairman’s whims and wants were quickly disseminated through his new organization—as they are now with the current Federal Reserve—and implemented simultaneously on all bank holding companies, depositories, mortgage lenders, investment banks, insurance companies, hedge funds and others, than the answer is, “Yes, the Fed on roids still would be THE FED!”

The key to Fed power, in part beyond the way it nurtures its own history, is the 14 year terms of the Fed governors, meaning they serve longer than the President who named them. Keep those lengthy appointments for the Fed, only, and you maintain the central bank’s “independence,” although historically the Fed has given most Presidents the monetary policy they wanted.

Secretary Paulson isn’t proposing anything as audacious as what I am suggesting, but he should. Aim short—and such mini-consolidations is what he is proposing—and you just are putting band aids on a serious slash wound. You don’t solve the problems.

Despite their rhetoric, no financial firm wants to be closely regulated. It cuts down on their discretion and chance to earn profits. But, tough noogies!!

Bigger isn’t always better, but sometimes it is.

A single federal financial regulator would cut down on a lot of the regulatory duplication as well as regulatory vacuum which exists (who watches GE or AIG?), and the “regulator shopping” and playing off state and federal regulators, which inevitably occurs. And just think, it will save (or cut) lawyers fees as the attorneys and lobbyists would have fewer places to turn and try and stop actions they oppose—except the Treasury which still would have its traditional role and be the unambiguous voice of the President on financial matters.

If Congress really got bold, at least on the mortgage side, it would figure out how to bring non-federally sanctioned appraisals and the wasteful title insurance industry into the federal regulatory orbit.

Yes, I would bag some of the “checks and balances,” which we love as a nation and which are used and abused by the financial services industries, but you either fix the problems or add to the mess.

Maloni April 1, 2008

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