Yesterday I stopped by a New America panel on a new book by Harvard Professor Daniel Carpenter, "Reputation and Power." It's an exhaustive history of the Food and Drug Administration, but more importantly, it articulates a general theory of how regulatory agencies do -- and should -- work. For our purposes, we can apply these ideas to financial regulation, and to that end I recommend Steve Teles' book review.
A problem with our current system of financial regulation is the lack of trust for our regulators, between the reality of recent incompetence, the dangers of industry capture and the prevalence of a rigid, anti-regulatory ideology among some appointees. That can be dangerous, Teles writes:
In Carpenter's view, bureaucrats (and others in public life) fundamentally seek the esteem of others. And their reputations improve when they work for organizations with good reputations, just as they are tarred when they work for disreputable agencies. This leads to a virtuous cycle: agencies with strong reputations attract more talented staff, which improves their actual performance. This, in turn, further bolsters their public image. Obviously, the same thing is true in reverse, which is why agencies with tarnished reputations so often have a hard time pulling themselves out of the ditch. Thus there is an incentive for bureaucrats not only to do good work, but also to build agencies with the power and autonomy to control their own agenda.
The challenge for financial regulators now is getting out of the ditch. Obama has made some strong appointments -- Daniel Tarullo at the Fed, Gary Gensler at CFTC -- and some weak ones, notably Ben Bernanke as Fed Chair. Phillip Longman, who was also on yesterday's panel and has written a book on Veterans Administration hospitals, noted that although the VA had an initially rocky (and wildly corrupt) start, it managed to improve its image by reforming its bureaucracy and increasing transparency. But it also cultivated an institutional culture that developed a commitment to its larger mission.
That last factor may be a missing ingredient, and adding it to the mix may demand some outside-of-the-box appointments from the administration -- people who can instill a top-down sense of purpose at these agencies: Someone like "J. Edgar Hoover's FBI, James Webb's NASA, or Curtis LeMay's Air Force," as Teles puts it.
Two obvious opportunities: If the financial reform bill passes, the director of the new Consumer Financial Protection Agency will have the ability to set the tone for the new regulatory agency. Elizabeth Warren would be the preferred choice, but the question is whether President Obama is willing to put his weight behind someone who chooses blunt truth over politesse. A new national banking regulator will also be appointed this summer, and that person will also manage a newly-consolidated agency. It's less clear to me who that person should be (perhaps Assistant Treasury Secretary Michael Barr, also in the running for the CFPA job?), but it ought to be someone who can think beyond our normal and diminishing expectations of the regulator's role. We need some new G-Men.
-- Tim Fernholz
