Who Will Regulate the Regulators?

Should the Fed be the systemic risk regulator?  On the plus side:  the Fed has great institutional credibility and independence developed over many decades.  On the negative side:  the Fed already has quite a lot on its plate.  And it's not accountable for its mistakes in the same way that other government regulators are.

Tyler Cowen makes the case for making the Fed the systemic regulator:

Assuming we are going to do it, I think it has to be the Fed, whether we like it or not.  It's the Fed who is the fireman with the awesome power to print money, move markets, lend to the banking system on a large scale, and now even conduct fiscal policy, all without Congressional approval.  Our textbooks speak of the Fed as a lender of last resort but very often it is the lender of first resort too.

If you stuck another agency into that mix, it would end up waiting for the Fed's go-ahead, once an actual crisis arrived.

OK, so the systemic regulator is the Fed.  But then you can't make the systemic regulator too accountable to Congress without eliminating the quasi-independence of the central bank.  There's not any comfortable point on the power-accountability continuum, mostly because we don't trust Congress to run monetary policy.

The stinger on the tail is this: we want the Fed to deliver low inflation.  That means we let it be influenced by financial creditor interest groups but not so much by populist interest groups (Adam Posen had a good piece on this but I cannot recall the reference).  Right now a lot of people are asking for more populist regulation without realizing that also requires more populist monetary policy.

I think systemic resolution is important, and it certainly wouldn't hurt to keep an eye on systemic risk.  But Tyler is probably right that we cannot get the financial regulation we want until we decide what we want:  low inflation, low interest rates, and broad credit availability; or low risk and low profits in the banking sector.

I'm also generally skeptical that we're going to achieve the implied goal of making sure that financial crises never happen.  If anyone, including congressmen or regulators, had believed that there was a reasonable risk of the financial crisis we just experienced, it never would have happened.  That's what you have to fight, not some perceived imperfections in the regulatory structure.