19 October 2011

Even More Reason To Pay Attention

Remembering back a few posts, I discussed how it looked like a number of US financial regulators and the Departement of Justice seemed to be credibly committing to bad supervision.

This is especially worrying given this recent summary of how Dodd-Frank limits the powers of the Fed/Treasury/FDIC to respond to financial crisis. Though the idea may be to limit moral hazard by credibly committing to not give 2008-style bailouts, I have a hard time believing in this credibility. My initial thought is that no democratically elected government would actually not respond if their economy was collapsing because of a financial crisis. So, if a major crisis hits, these Dodd-Frank provisions will merely slow down the inevitable bailouts (may of the powers can be enacted with congressional approval). There is still moral hazard feeding potential crises, but crises responses will be slower.

As the Economist rightly points out, regulators have even more imperative to prevent a crisis. But to do this they need to know what is going on. They should not be weakening their independent supervisory power.

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