Posted by Kenneth Anderson:
Is Financial Regulation Overhaul Stumbling? And Can the Fed Remain 'the Fed'
After the Overhaul?
http://volokh.com/archives/archive_2009_08_02-2009_08_08.shtml#1249398214
(Update: In other news out of Washington DC today, my sixteen year old
daughter got her driver's license this morning, in a road test that
she herself described as "weirdly easy" and which Dad will rephrase as
"alarmingly" so.)
"Overhaul Stumbles" is how the headline the Wall Street Journal put
things this morning in its account of a high level meeting of Treasury
Secretary with other top financial regulation officials, including Fed
chief Bernanke, SEC Chairman Schapiro, and FDIC head Sheila Bair:
[1]"Geithner Vents as Overhaul Stumbles." (WSJ, Tuesday, Aug. 4,
2009.) According to the article:
Treasury Secretary Timothy Geithner blasted top U.S. financial
regulators in an expletive-laced critique last Friday as
frustration grows over the Obama administration's faltering plan to
overhaul U.S. financial regulation, according to people familiar
with the meeting.
The proposed regulatory revamp is one of President Barack Obama's
top domestic priorities. But since it was unveiled in June, the
plan has been criticized by the financial-services industry, as
well as by financial regulators wary of encroachment on their turf.
Mr. Geithner told the regulators Friday that "enough is enough,"
said one person familiar with the meeting. Mr. Geithner said
regulators had been given a chance to air their concerns, but that
it was time to stop, this person said.
What's the pushback about? Turf battles among agencies, according to
the article. Put substantively, Bair and Schapiro both object to the
Administration's plan to vest so much of the authority for dealing
with financial crises, under the doctrine of safeguarding against
systemic risk, in the Fed:
Ms. Schapiro and Ms. Bair, among others, have argued that more
authority should be shared among a council of regulators.
"You are talking about tremendous regulatory power being invested
in whatever this entity is going to be," Ms. Bair told the Senate
Banking Committee last month. "And I think, in terms of checks and
balances, it's also helpful to have multiple views being expressed
and coming to a consensus."
Officials from the Federal Reserve and the Office of the
Comptroller of the Currency, meanwhile, have questioned the
creation of a new federal agency to oversee consumer regulations, a
move that would take away powers from both institutions.
But the article makes reasonably clear that, despite the agency
battles over who gets or does what, the legislative actions on the
various piece of the reform plan will mostly - not completely by any
means, but mostly - take place. As has been noted, industry groups
have gotten active in lobbying on this or that, threatening to kill
the Administration's overall proposal by a thousand small cuts, but my
impression is that at least at this stage, the Administration's basic
plan is on-track legislatively. (I put up an earlier post about the
Treasury plan and its views on global financial regulation reform; I
will try to put up some other posts going to particular parts of the
Treasury proposal - and if I'm lucky, get them up before anything
happens legislatively (!))
An important question is raised by the Administration's plan to place
so much of the power for addressing systemic risk in the Fed, and it
does not appear to me to have been extensively discussed, at least not
in the terms I suggest here. The question is whether the Fed, so
empowered with all these new functions and duties and powers and
authority, can remain the Fed. Will the Fed remain the Fed?
(This is leaving aside the other huge policy presumptions of the
Administration's proposals, starting with acceptance of certain
institutions as too big to fail and attendant moral hazard.)
A principal reason why the Administration's plan proposes to use the
Fed is that it has enormous latent powers to act and legitimacy to do
so. But its ability so to act depends upon a peculiar expression of
legitimacy in a democratic system - its reputation for being above
day-to-day politics while still taking the most profoundly political
actions conceivable (the issuance of fiat money). Its relationship to
Congress is one of reporting and expressing all the properly
democratic sentiments of obeisance to the crowd of nitwits, blowhards,
and self-dealers who have managed to entrench themselves as
rent-extractors on the dividing line of public and private; but who,
for all that, are the People's Representatives (God save us all) in
our extended exercise in democratic self-government.
The system for its legitimacy depends upon exquisite attention to the
forms of democratic obeisance while taking actions that will almost
certainly cause pain to many of those democrats' cherished
constituents, in the larger cause of managing the currency and the
banking system. Our democracy depends in many respects upon
establishing institutions that we empower to inflict short term pain
in pursuit of our collective long term interests. Institutions that
sit uneasily in a fully democratic system because they are, in one
sense, a complement to it, but in another sense something close to a
rebuke. Above all it is a question of legitimacy. The Fed cannot
ground its legitimacy solely in its technocratic expertise, because
that is finally incompatible with democracy; it cannot ground its
legitimacy in purely democratic exercises, because its exercises of
power are constructed by a democratic system to be, in its most
profound actions, taken on the basis of expertise, not popular
democratic will in the ordinary sense.
The peculiar mixture of legitimacy is a little like bait and switch,
but deliberately designed to be that way. uggest that the Fed should
do 'x' because it is the will of the Congress, and it will do whatever
it does asserting that it acts from its expertise. Suggest that the
Fed should do 'y' because that is the expert thing to do, and it will
do whatever it does asserting that, after all, it is a democratically
accountable institution with a governing statute and specific limited
power, despite their discretionary nature. That's what gives it the
ability to act with legitimacy. But it is a delicately balanced form
of legitimacy that sits far more uneasily as a matter of both politics
and democratic political theory than it might appear. It is a source
of legitimacy that is far more easily upset and destabilized than we
think; we take the Fed's vaunted 'independence' - even understanding
that as a highly nuanced, complicated, ad hoc, shifting balance of
power than it first appears - quite possibly far too much for granted.
Arguably the Treasury plan takes the permanency of the Fed's
legitimacy far more for granted than it should. Very little in the new
grant of power or authority to the Fed takes account of the idea that,
for example, a Fed that is supposed to supervise, scrutinize,
divinize, and so on, in all these new ways will not the same Fed, the
stable ideal of which we relied upon in giving it all these new
functions. To the contrary, giving it these new functions shifts the
balance of legitimacy - surely in the minds of Congress, to start with
- toward the idea that the institution is and ought to be far more
politically accountable in the day to day to Congress than it is now.
Even a shift in the expectation has an important possibility in
shifting, and undermining, the Fed's legitimacy - and yet it was
precisely that legitimacy which was the attraction of putting all
these functions onto the Fed in the first place. Time will tell how
new functions will alter the political nature of the Fed, and its
balance of power with Congress. And most of all its legitimacy to be
able to inflict short term, severe pain (think Volker in the early
1980s) in the interests of the long term good.
This is not necessarily a reason not to go down this path. No doubt
this very question - it is not un-obvious, after all - has been
extensively discussed in formulating the Treasury plan, and the
failure to raise it a deliberate one (if a mistake, in my view). But
there is good reason to wonder whether the ideal of the Fed on which
we place so many new duties can be, in virtue of those new duties, the
old Fed. Are we asking to have our cake and eat it too?
(Note: Several years ago, Yale constitutional law scholar Jed
Rubenfeld published a short book on time horizons in a democracy, on
Jefferson's views on whether the dead hand of the past should be able
to bind the future, [2]Freedom and Time (2001). When I read it, I
thought it an extraordinarily smart and profound take on a topic that,
however, seemed to me then an almost wholly abstract jurisprudential
proposition. I've since changed my mind completely, and re-read the
book; it's a book whose argument deserves a close re-consideration in
our present circumstances. There's a very important connection to be
made between the arguments in that book, and consideration of the
relationship of a democracy to ... long term credit markets and
ethical and legal considerations in making decisions what burdens to
impose or not impose upon future generations. I would be curious
whether Jed has had any thoughts on the application of those arguments
from almost a decade ago to today's circumstances.)
References
1. http://online.wsj.com/article/SB124934399007303077.html
2.
http://www.amazon.com/Freedom-Time-Theory-Constitutional-Self-Government/dp/0300080484/ref=sr_1_4?ie=UTF8&s=books&qid=1249397682&sr=8-4
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