Some Preliminary Thoughts On Regulatory Reform

Increased Powers for the Fed

The rhetoric so far is exaggerating the extent of new powers for the Fed. Since the major investment banks converted to bank holding companies (BHC), the Fed already is the primary regulator, at the BHC level, of the largest financial institutions. Nonbanks like AIG  would represent some expansion, but even that was taken on last year on an emergency basis.

A New Consumer Protection Agency

If I were still president of the Dallas Fed, I’d be happy to lose this function for selfish reasons. Consumer “advocates” are very aggressive and often abusive in their approach. Good riddance!

For the good of the country, however, putting this function into a specialized agency that doesn’t have other responsibilities that bring balance into the picture is a bad idea. Over time these advocates will find themselves pushing on an open door, and the agency itself will become an advocate of proposals that appear consumer friendly on the surface, but will likely have adverse unintended consequences for consumers.

Abolishing the Office of Thrift Supervision

This isn’t necessary on quality grounds. They do as good a job as the bank regulators. Hopefully, their personnel can be folded into the new banking agency.

The elimination of the federal thrift charter may be a good idea. Thrifts are currently prevented by their charters from diversifying sufficiently out of real estate lending. Morphing them into banks will make them safer.

More to come later.

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