Alan Blinder is a very good economist, but that does not keep him from occasionally saying very silly things. He has been a big advocate of creating a "systemic risk regulator" and making it the Federal Reserve Board. This systemic risk regulator would have the responsibility for preventing the sort of explosive growth of risk that we saw during the housing bubble and manifest most directly in AIG's issuance of credit default swaps reaching well into the trillions of dollars. Of course it would be great to have some government agency, or even a private one, that could provide the early warning signs when things were getting out of control. But calling an agency the "systemic risk regulator," doesn't change anything by itself. To see this point, let's run history backward. Suppose Alan Greenspan had been the official "systemic risk regulator" in the years from 2002-2006, as the housing bubble was growing out of control. Instead of saying that there is no housing bubble and that there is nothing to worry about, would systemic risk regulator Alan Greenspan have said: "oh my god, there is a huge housing bubble and when it crashes it will sink the economy"? That doesn't seem very plausible. We could have given Greenspan any title we wanted, but it is unlikely that it would have affected his conduct. If we want regulators to prevent something like the disaster we are now experiencing it is necessary to sanction them when they fail, for example by firing them. However, no regulator was fired for failing to prevent the most massive economic crisis since the Great Depression. In fact, Ben Bernanke, the person most responsible for this disaster, after Alan Greenspan, was just reappointed as Fed chairman to near universal praise. If regulators suffer no career consequence for even the most massive failure, then they have no incentive to ever buck the financial industry, since they will face career risks from challenging powerful actors in the financial industry. This failure to hold regulators accountable virtually guarantees future crises. People who understand economics know this.
--Dean Baker
