I'm at the "Make Markets Be Bananas Markets" conference today, where a lot of smart ideas are being explained very quickly. You should really read the whole report [PDF], especially Raj Date's assessment of what to do with Fannie and Freddie, an issue that has lurked like an iceberg underneath the sea of regulatory reform. But since that's too complicated to gloss quickly, another presentation by law professor Richard Carnell raises this question: Why does John Dugan still have a job?
Dugan is the Comptroller of Currency, whose job is regulating a number of major commercial banks. His unswerving belief in deregulation led him to be, by all accounts, a terrible regulator. But he's still in charge! As Carnell explained, regulators have perverse incentives because lax regulation during good times wins them praise and the benefits of lax regulation are concentrated in a vocal minority (the financial sector) and the costs are spread over a disorganized majority (taxpayers). To fix this, Carnell thinks we should consolidate all prudential regulators into one agency to prevent a subset of the financial industry from having undue influence. He also thinks we should create statutes that provide clearer guidance to regulators, especially on raising capital levels outside of a crisis, and make sure that regulators are held accountable by the political process.
Which is why one thing Obama could do right now is fire Dugan and replace him with someone who thinks regulation is a good idea. It's a step toward better incentives for regulators.
-- Tim Fernholz
