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Roubini: Obama banking reforms get it 75% right

by Morgan on June 20, 2009

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Nouriel Roubini thinks that the new Obama banking reform plan gets it 75% right.  This in a video interview on Yahoo! Finance.  His one caveat is that the previous Fed under Greenspan had all the power, but didn’t care about managing risk, they wanted innovation at any cost.  That mindset led us to the big bust – so that in addition to the reforms, there must be people who believe that their job is to minimize and manage risk, no push the market towards untested innovation and accumulation of risk.

An overview of the reforms by the WSJ:

Roubini’s interview:

I imagine our regular commenter Capitan Ned has something to say about this. That the push towards unifying regulatory control under one or two federal bodies reduces regulation to the lowest common denominator, easily influenced by the lobbying of the biggest players in Washington, while the people are left hung out to dry. Better, let the states enact and enforce lending at their level, where more oversight and a better understanding of local markets and trends can be applied towards common sense regulation. Further, haven’t we seen concentrated power at the federal level already? And didn’t that precipitate the bust? Letting big, federally chartered banks run rampant with state governments unable to reign in predatory practices? See Wachovia. At least, that’s what I think he’d say.

I’d make a slightly different argument. That we have all the laws we need currently. Maybe a few need to be tightened up, and I’m fine with that. However, instead of simply passing new legislation dollars must be invested in oversight and regulatory scrutiny and prosecution. Laws without enforcement are worthless, and that’s the system we’ve been dealing with over the last decade. In fact, regulatory bodies have been so thinly staffed on the enforcement side that they were unable to keep up with the boom and growth in the market. (For example, California’s department of real estate only had 37 enforcement officers for 500,000 licensed individuals.) This cannot happen again if we’re to expect the new legislation to make one iota of a difference.

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  • Don
    Excellent post Morgan!
  • Captain Ned
    Yep, that's what I'd say, and I'll be even more right if and when this abomination gets signed into law.

    I also agree that we have all the laws we need, especially at the state level. I definitely agree with the resources issue. Most state-level banking departments are self-funded through licensing fees and assessments, so we can never take in more than we spend. When crunch time hits our revenue goes down, so we shrink when we should grow.

    Here's my simple way of doing things:

    All bank-level activity is regulated primarily by the FDIC. FDIC is lead agency on every bank exam; the states, OCC & Fed can participate jointly but have no lead role beyond enforcement of jurisdiction-specific issues. Safety & soundness is solely FDIC's call. Legislation is passed to remove the Federal preemption on activity by subsidiaries and d/b/as of Federally-chartered institutions. If you want to benefit from the Federal preemption, you need to do it in the name of the bank whose deposits FDIC insures. You need to buy the reputation risk. If you wish to hide the business in subsidiaries, you're fully subject to state-level law. OTS is closed and the Home Owners Loan Act repealed. Federal thrifts either convert to National Bank Act institutions or state-chartered institutions.

    I'm no fan of giving the Fed the systemic risk powers proposed, but some level of systemic risk authority needs to be there if FDIC has a bad day and doesn't clamp down when it should. I've got no good way of structuring this in advance because the next crisis won't look like the last few. I think one good thing would be a single term for any Fed Chair. We all put our faith in Greenspan for far too long, only to be hosed in the end.
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