Before us we have the proposal to expand the powers of the Federal Reserve as the systemic risk regulator.
Thus within 18 months of taking office, Obama will likely have appointed five of the seven Fed governors . The central bank is designed to be independent from politics, so a president's best chance of influencing how the Fed will regulate banks or respond to economic changes is through these appointments.
The Federal Reserve acts independently of government, with pretty much only these appointments, each a 14 year term, and confirmation of each governor by the Senate.
Considering we cannot find out which institutions received Federal money or where the $12.82 trillion dollars of Federal Reserve financial commitments are, isn't this making the Democratic aspects of financial regulation even worse?
During the Bush administration we had then Treasury Secretary Hank Paulson, acting as CEO in Chief, strong arming banks and even Congress into passage and use of the TARP. No other ideas were seriously considered and Congress simply handed over the cash with a lot of scare tactic rhetoric.
Some of this occurred due to the assumption if Merrill Lynch was allowed to go bankrupt, the entire global financial system would collapse.
But is this assumption even true? The GAO has admitted in their latest report, they cannot ascertain the effectivness of TARP.
Now, again, building on the assumptions of contagion and system risk, proposals are developing to create a super czar of regulatory powers, assigned to the Federal Reserve.
Was the TARP even really necessary?
Geithner's care-free attitude about banks repaying the government early defies a truth about the program: many banks were forced to take bailout cash to cover for troubled banks that truly needed it. The government, which never gave detailed criteria about what institutions would qualify for TARP cash, intentionally tried to create confusion around the program.
What about simply reinstating Glass-Seagall? (Alternatively repeal Gramm Leach Bliley) What about simply repealing the Commodity Futures Modernization Act?
What about that commission to even determine specifically how this all happened in the first place? Since this bill passed I have not heard a word on finance forensics. Instead hear we will have yet another major policy reform, perhaps the biggest reform in 50 years, ramrodded through Congress.
What bothers me most on financial regulatory reform is the lack of examining the regulatory system as a whole. While the focus is on systemic risk and contagion within the financial system, how about systemic risk by one regulatory agency running amok due to too much power, no oversight, corruption, poor leadership and/or no transparency?
Last information I have is contagion is not understood and assuredly the specifics of systemic risk are not either. Wouldn't it be better to actually comprehend these issues and carefully craft regulatory reform accordingly?
Creating a bureaucracy is a non-trivial event, yet finding even a flow chart for checks and balances in these proposals has been deemed a hunt in the Google outback.
While Congress is holding massive hearings, the actual legislative text is being written by the Obama administration.
Since we already know their game plan, this is not good. What's the point of having so many hearings if one is not going to craft legislation from the results?
The SEC, CFTC will now share regulation on derivatives, but what about the structure of those derivatives themselves? Many of these models, or financial innovation (which seemingly should be retitled financial obfuscation) are based on bad math, so what good is regulation when the actual thing being regulated is a work of fiction?
Here is the current regulatory flow chart Medusa:
Source: Financial Times, click image to enlarge
Believe this or not, there is no organizational flow chart on overall regulatory reform. It appears that the above chart will remain intact, with an additional layer of council of advisers to (cough) oversee the new powers of the Federal Reserve, the death for the Office for Thrift Supervision, and a creation of a new agency, the Consumer Financial Protection Agency.
But how all of these various regulatory bodies interact into a cohesive system is muddled as mystery meat pot roast.
How this does not pass even more power to the Federal Reserve, the Treasury and the executive branch is very unclear. Maybe that's the point of the design?