Obama has announced a sizeable overhaul of the structure of financial regulation in this country. Here's a look at the provisions, and some thoughts about their costs and benefits.
- Giving the Fed systemic risk regulation authority The Fed has, unsurprisingly, been talking up this idea for quite some time. No one was really in charge of regulating the bank holding companies, and more importantly, no one had the legal or political tools to deal with such a vast failure. This seems like a good idea. The biggest worry is that this will seriously challenge the independence of the Federal Reserve. Congressmen really like to fiddle with their friendly neighborhood banking regulations.
- Eliminating the Office of Thrift Supervision There's been a lot of talk about regulatory arbitrage as a source of the instability that brought the system down, and President Obama name-checked this idea in his speech. I think this is overblown; the actual examples of regulatory forum-shopping, rather than a theoretical belief in same, are pretty thin. On the other hand, I'm hard pressed to come up with a good argument as to why the Office of Thrift Supervision should exist.
- Creating a new consumer protection agency. I can only presume that the hand of Elizabeth Warren is in here somewhere, as this is one of her pet ideas. As it stands, it's at worst harmless, and at best mildly helpful; Obama's speech put the focus on transparency. On the other hand, I'm hard-pressed to see that it will make much of a difference. The problems that are now bringing consumers low are not the things hidden in the fine print. They're the things that were right out there on the front page: their interest rate. The size of their loan relative to their income. The fact that the interest rates on adjustable rate loans can adjust upward. The people who took out Option ARMs or borrowed $40,000 in credit card debt on a $45,000 income were not unaware of these things. They ignored them. It's not a terrible idea, but I'm skeptical that it will have any effect.
- Making originators retain a percentage of the loans they originate. Again, not a bad idea. But I'm skeptical that this will change much. The biggest problem with firms like Lehman is that they held onto too much of the toxic waste they were churning out. Nor has a similar regulation saved Spain from an enormous housing bubble, and a correspondingly enormous messy pop.