What happens when an economic model can’t straightforwardly deal with the role of power in the economy? You get bizarre ideas like the one presented in the New York Times.
Gretchen Morgenson, one of the smartest business writers around, asks what we’re going to do about the financial regulators who completely failed us.
Even though calamitous lending practices laid waste to the nation’s economy, surprisingly little has changed about how the financial arena operates and is supervised…. Senior regulators who stood idly by for years as financial firms built their houses of cards have been rewarded with even bigger jobs or are jockeying for increased responsibilities. The Federal Reserve Board, for example, wants to become the financial system’s uber-regulator, even though its officials did nothing as banks made deadly decisions to lend recklessly and leverage themselves to the max….
Yet those in the public sector ask us to believe that regulators who snoozed during the credit bubble will be alert to emerging problems on their beats when the next mania begins.
Her solution: a proposal by Prof. Edward J. Kane.
To bring accountability to regulatory performance, Mr. Kane suggests that financial supervisors take an oath of office in which they agree to perform four duties. First is the duty of vision, under which they would promise to adapt their surveillance practices to respond to the creative ways financial institutions hide their dubious practices. Regulators must also promise to take prompt corrective action, and to perform their work efficiently. Finally, there is what Mr. Kane calls the duty of “conscientious representation,” whereby regulators swear to put the interests of the community ahead of their own….To ensure that regulators live up to the promises they make, Mr. Kane suggests that inspectors general at each agency be charged with regularly auditing the performance of financial overseers. A crucial component of those reviews would be exploring attempts by regulated entities to influence the officials who oversee them.
In doing so, we could strive for “perfectly virtuous” financial regulators:
“If real world supervisors were perfectly virtuous, they would make themselves politically and financially accountable for the ways in which they exercise their discretion,” he writes. “Perfectly virtuous supervisors would fearlessly bond themselves to disclose enough information about their decision making to allow the community or interested outsiders to determine whether and how badly they neglect, abuse, or mishandle their responsibilities.”
Maybe we could also get the regulators to wear togas?
Oaths and inspector generals vs. Wall Street is like me vs. Mike Tyson — not even a crack addict would have trouble figuring out who’s gonna win.
If you’re going to ratchet down Wall Street’s power to influence regulators, there are only 2 ways to do it: chop way back the size of Wall Street, or create checks and balances. The fact that someone as thoughtful and knowledgeable as Morgenson can’t see that — that she’d write a column about oaths and inspector generals — shows just how big the power blind spot is the conventional economic model.
