It's one of the unfortunate wrinkles of the regulatory process that it tends to occur at the moment when it's least necessary. For instance: We really could have used some good financial system regulation eight years ago. But we're going to get it now. And it will protect against all the things that no one will do for a long while, and will likely not protect against the many things that will cause the next crisis.James Kwak suggests we imagine what would have happened if Alan Greenspan had been a more empowered regulator in 2005. That, of course, is when he said “we don’t perceive that there is a national bubble”, just “a little froth.” In March 2007, Bernanke said “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” Given regulatory authority over Citibank's leverage, how likely do you think it is that Greenspan would have used that authority?It's nice, in other words, to have a systemic risk regulator, as Geithner suggested in his testimony. But it's not an obvious solution. The tendency is for the regulator to be least effective when he's most necessary. Think too about how much money, and thus political power, a "too big to fail" company possesses. "It's best," says Kwak, "to minimize the chances of systemic risk getting big in the first place." Better than empowering regulators to examine companies that are "too big to fail" would be keeping the companies from becoming "too big to fail" in the first place."Size can definitely go away," argues Kwak, "simply by setting a cap on the volume of assets any institution is allowed to hold (and doing something about off-balance sheet entities). And if a highly interconnected, highly complex but small financial institution fails, the system as a whole would be fine." I imagine there are a lot of options for regulating size. And I imagine there would be a lot of arguments about how to determine the cap. But this is the right way to think about the regulatory changes. It's a policy that prevents our reliance on omniscient regulators rather than a policy that depends on their existence and independence. In that way, it's actually a relatively conservative -- or at least public choice-oriented -- way of looking at the problem, though I doubt it'll gain much bipartisan support. DON'T TRUST THE REGULATORS.
It's one of the unfortunate wrinkles of the regulatory process that it tends to occur at the moment when it's least necessary. For instance: We really could have used some good financial system regulation eight years ago. But we're going to get it now. And it will protect against all the things that no one will do for a long while, and will likely not protect against the many things that will cause the next crisis.James Kwak suggests we imagine what would have happened if Alan Greenspan had been a more empowered regulator in 2005. That, of course, is when he said “we don’t perceive that there is a national bubble”, just “a little froth.” In March 2007, Bernanke said “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” Given regulatory authority over Citibank's leverage, how likely do you think it is that Greenspan would have used that authority?It's nice, in other words, to have a systemic risk regulator, as Geithner suggested in his testimony. But it's not an obvious solution. The tendency is for the regulator to be least effective when he's most necessary. Think too about how much money, and thus political power, a "too big to fail" company possesses. "It's best," says Kwak, "to minimize the chances of systemic risk getting big in the first place." Better than empowering regulators to examine companies that are "too big to fail" would be keeping the companies from becoming "too big to fail" in the first place."Size can definitely go away," argues Kwak, "simply by setting a cap on the volume of assets any institution is allowed to hold (and doing something about off-balance sheet entities). And if a highly interconnected, highly complex but small financial institution fails, the system as a whole would be fine." I imagine there are a lot of options for regulating size. And I imagine there would be a lot of arguments about how to determine the cap. But this is the right way to think about the regulatory changes. It's a policy that prevents our reliance on omniscient regulators rather than a policy that depends on their existence and independence. In that way, it's actually a relatively conservative -- or at least public choice-oriented -- way of looking at the problem, though I doubt it'll gain much bipartisan support. 
