Steven Pearlstein wrote a pretty weird column in the Washington Post on the Senate's regulatory reform legislation. It's odd because, in describing the Senate compromises, it becomes clear that Pearlstein doesn't know why a Consumer Financial Protection Agency is important, he doesn't understand how the financial reform bill that passed the House last year deals with Too Big To Fail, and he isn't aware of other outstanding issues that still prevent a working compromise. While Pearlstein celebrates this potential compromise as a breakthrough -- and we'll await further detail, of course -- I don't think he's begun to consider whether this deal represents significant reform.
Starting with CFPA, Pearlstein breaks the news that it will not be an independent agency but rather one half of Dodd's long-proposed consolidated federal bank regulator, where it will be co-equal with traditional prudential regulators. While Pearlstein is content to discuss the political optics of the CFPA while underplaying its "practical significance" -- in truth, a functioning CFPA would not only have ameliorated the housing bubble but also shored up the broader economy by limiting bad consumer debt -- so it may be worth his time to look into the underlying policy.
The deal isn't a compromise. It's what we already have, merely consolidated. This structure would replicate the current institutional problem: Consumer issues consistently take a backseat to prudential issues whenever they are housed in the same office, which is why so many experts have asked for an independent agency. I see no reason that this structure wouldn't continue the trend of prioritizing prudential regulators to the detriment of consumers. There is no mention of independent rule-making, examination, or enforcement authority. Will the CFPA-side of the consolidated regulator have access to the non-bank financial institutions, particularly independent mortgage brokers that drove the sub-prime housing bubble? If it doesn't, it's a severe problem.
Then, on Too Big To Fail, Pearlstein really wings it. His description of the "Senate compromise" on that issue is the same as the dissolution authorities already in the House bill -- the only difference is that the costs of dissolving insolvent institutions are assessed in advance under the House legislation and dealt with after the fact in the Senate version. The actual mechanisms of dealing with failure are exactly the same [PDF], so it is unclear why Pearlstein trumpets this as a big compromise. His characterization of the House bill as favoring bailouts or not rejecting Too Big To Fail is false.
Nor does his column reflect the actual difference between the House and the Senate on how to regulate systemic risk before a crisis: Both chambers favor a council approach; the House favors the Fed chairing the council, and the Senate favors having the Treasury take the lead. I'd love to hear Pearlstein's opinion on why a less-independent regulator would be an improvement over the House's plan. He also seems to disparage the idea of having systemically risky institutions, as judged by regulators, face leverage limits and higher capital requirements. Does he think that's a bad idea?
Finally, he doesn't mention a number of outstanding issues that have the possibility to derail this compromise. One is the Volcker rule, which would restrict the scope and size of banks. Pearlstein also dances around the role of the Fed -- one major unanswered question is whether the Fed's will continue to have regulatory authority or whether those powers will be absorbed by the consolidated bank regulator. And one big word is missing in Pearlstein's column: derivatives.
Oh, and I challenge Pearlstein to name a few of the supposed "Liberal Democrats who insist that the only solution is to micromanage the financial services industry from Washington." Can he do it?
-- Tim Fernholz
