People who hate on Paul Krugman for his love of larger government might be pleased with his latest commentary on financial reform.
The Dodd bill that the Senate is threatening to pass has some good elements, Krugman says — the ability to set leverage limits and seize financial institutions that are going bust.
But the problem is that it merely provides the ability to do these things. And then it leaves the actual decision to do these things to a committee composed of… well, folks like this:
[I]n 2005 the chairman of the Fed was Alan Greenspan, who dismissed warnings about the housing bubble — and who asserted in October 2005 that “increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system.”
Meanwhile, the secretary of the Treasury was John Snow, who … actually, I don’t think anyone remembers anything about Mr. Snow, other than the fact that Karl Rove treated him like an errand boy.
The comptroller of the currency was John Dugan, who still holds the office. He was recently the subject of a profilein The Times, which noted his habit of blocking efforts by states to crack down on abusive consumer lending, on the grounds that he, not the states, has authority over national banks — except that he himself almost never acts to protect consumers.
In a tough administration, in other words, we’d be fine. In a boneheaded one, with regulators asleep at the switch, we’d be hosed.
So what’s the answer? Write the requirements into law:
So what the legislation needs are explicit rules, rules that would force action even by regulators who don’t especially want to do their jobs. There should, for example, be a preset maximum level of allowable leverage — the financial reform that has already passed the House sets this at 15 to 1, and the Senate should follow suit. There should be hard rules determining when regulators have to seize a troubled financial firm. There should be no-exception rules requiring that complex financial derivatives be traded transparently. And so on.
Business Insider Emails & Alerts
Site highlights each day to your inbox.