In an op-ed column for the New York Times today, economist Paul Krugman argues that financial reform must be made "fool-resistant" by providing it with less reliance on regulators. In particular, he worries the systemic risk council could be too lax in creating strict enough rules to govern banks. Instead, he thinks the legislation should be more aggressive to create more specific, immutable rules.
Krugman begins by explaining that one of the major reasons for the financial crisis was too much leverage building up in the shadow banking system. He then writes:
The Dodd bill tries to fill this gaping hole in the system by letting federal regulators impose "strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity." It also gives regulators the power to seize troubled financial firms -- and it requires that large, complex firms submit "funeral plans" that make it relatively easy to shut them down.
That's all good. In effect, it gives shadow banking something like the regulatory regime we already have for conventional banking.
But what will actually be in those "strict rules" for capital, liquidity, and so on? The bill doesn't say. Instead, everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.
He worries that the council simply won't do the trick. He bases this on the fact that those who would have been on the council in 2005, including Federal Reserve Chairman Alan Greenspan, Secretary of Treasury John Snow and Comptroller of Currency John Dugan wouldn't have changed a thing. It's plausible that he's right.