In my June 24 and 29 blog entries, I made a few very modest suggestions for financial regulatory reform: a 9/11 Commission type of study of the causes of the financial crisis (and ensuing depression); a plan for rotating financial regulatory staff among the different financial regulatory agencies; the creation of a financial intelligence and contingency planning capability in the Federal Reserve; knitting the state banking and insurance regulators into a national "early warning" system of financial danger signs; financing financial regulatory agencies out of congressional appropriations rather than fees paid by the regulated firms. To this I now add another suggestion of modest reform: rather than create a Consumer Financial Protection Agency, just move the consumer protection divisions in the Federal Reserve and the other banking agencies to the Federal Trade Commission, consolidating them in a new Financial Regulation Division of the commission.
But the momentum for more-radical reform is powerful, and flat-out opposition unlikely to be effective regardless of its merit. So let me address in a constructive spirit what seem to me the far-reaching reform proposals that deserve serious consideration. These are: (1) gearing banks' capital requirements to the different phases of the business cycle; (2) making the Federal Reserve the systemic-risk regulator for the entire financial sector; (3) separating out commercial banking, mortgage banking, and money-market funds from other financial institutions, and making them safe; (4) regulating the compensation of top management of financial institutions that pose systemic risk; and (5) tightening regulation of derivatives, including credit-default swaps. I discuss the first three reforms in this first part of a two-part entry, and the other two reforms in Part II.