Yesterday, I wrote a post about how to attract employees for high quality regulators, or really how to pay for them. In response, a commenter noted that government cannot eliminate risk. I agree with that statement to a point: the government cannot eliminate all risk. Indeed, the government should not eliminate all risk, as an economy where firms don't take risks will have little innovation or growth. But the two aspects of regulation I was referring to really didn't refer to that kind of risk so much as creating a healthy financial system.
As for the new resolution authority, recently I've don't a lot of
In fact, this new agency would have no rule making capacity: it wouldn't really regulate. It would simply determine which firms might pose systemic risk, require them to submit plans and evaluate those plans. The risk it would seek to eliminate would be that the economy would face if one or more of these firms fail. In order to accomplish that goal, it would not have to anticipate when a future market shock might happen. Instead, it just has to understand the economy's connectedness. When a given firm fails, it needs to figure out how that one domino can fall but the rest remain standing.
I think that goal is not only possible, but desirable. As I've said before, such an authority would actually strengthen capitalism, because it would prevent the need to ever bail out another firm. Instead, bad companies would fail, as they should. But in doing so, they wouldn't take the entire economy with them.
I hope this makes clear that this authority wouldn't really exist in order to prevent firms from taking risk. In fact, it would allow firms to take as much risk as they want -- at their own peril. If that risk was too much, and the firm fails, then the resolution authority could quickly sweep up the pieces, and the economy would move on. It would eliminate the systemic risk, so that other firms don't suffer as a result of one bad apple.