The greatest surprise about the current economic crisis is that it came as a shock to anyone. In a rush to prove their prescience post facto, policy wonks and market watchers have unearthed a rich but disjointed narrative of economic signals that foretold the coming disaster. And yet, with few exceptions, no one connected the dots in time to save us -- or even themselves.
This follows the pattern of every market collapse. Even more, it reminds me of the terrorist attacks of 9/11.
In the wake of that tragedy, there was an outpouring of evidence that isolated intelligence officials, working at diffuse agencies, had suspected that trouble was coming. It also became clear that, collectively, our intelligence apparatus was not organized -- practically or culturally -- to effectively synthesize that information, draw actionable conclusions, and take preventative measures to avert catastrophe.
The omnipotent image of our intelligence services, so assiduously cultivated during the Cold War, was forever tarnished. James Bond, Dick Tracy, Jack Malone and Jason Bourne were knocked unceremoniously off their pedestals in the course of just a few news cycles. A flurry of finger-pointing and official demurrals ensued. What emerged from this bit of theater was the Department of Homeland Security.
DHS is opaque by design and necessity. The surest indication of its success is the fact that there has been no encore to 9/11.
Hunting terrorists carries us across continents and into a thicket of financiers, arms suppliers, military trainers, and collaborators. Likewise, monitoring the market recognizes no national borders or simple definitions of roles played by diverse financial institutions or financial instruments. Capital flows like a natural force; understanding it requires unnatural exertions.
The bankers and businessmen, policy-makers and credit-takers who steered us into the current economic storm bear absolutely no resemblance in their intent to the underworld of terrorists and criminals who launched the current world war. However, the global market system within which they operate is at least as complex as the international criminal underworld, and probably much more so.
Regulation became the watchword of the last Presidential election. The debate centered on how much regulation is appropriate. A more interesting question is what kind of regulation is appropriate.
A close member of my family runs a small retail bank. We don't discuss his work much, but it is impossible to ignore the gigantic tomes -- filled with infractions identified by regulators and the bank's itemized responses to each -- that sometimes take their place as impromptu furniture in his family room. I'm sure I must have rested a drink or a cocktail plate on them on occasion. My family member is as uncomplaining as he is diligent in complying with regulations, but I can't help thinking that his time consumed by addressing minutiae, as opposed to broader operating principles, would be better spent helping customers, overseeing employees, and growing the business. The fact that he manages to accomplish all of these things is a testament to his unstinting energy. It is not, however, an endorsement of the regulatory system to which he, and all bankers, must report.
Commercial banks -- the very institutions that originated many of the mortgage, auto, and credit card loans now blamed for the collapsing market -- are arguably the most regulated sector of the financial services industry. So why wasn't the current crisis killed at the root? The answer, I suspect, is a matter of scale and jurisdiction.
There is no scenario under which there would be enough regulators, cops on the beat, to investigate all the transactions performed by the American financial system. The scale of the job is just too big. Oversight, then, is an exercise in statistical sampling. Regulators dip into a sample of transactions and apply a battery of tests, rules and regulations. Chances are very high that they will find something wrong in any given instance, but the likelihood is just as high that they will miss broader patterns. That is precisely why the British regulatory system is designed around a set a principles, to be applied intelligently by individual regulators, instead an exhaustive catalogue of rules.
But even if an American regulator spies a disconcerting bank-wide trend, he does not have the jurisdiction to pursue it, as it moves from one financial institution to the next, from one sector of the industry to the next. He does not have the mandate or the expertise to trail a group of risky mortgages written by a retail bank, as they are bundled into a mortgage-backed security by an investment bank. A completely separate regulator, working for another agency, may not have the mandate or the expertise to follow that mortgage-backed security, as it is packaged by the same investment back, or another one, into a larger asset-backed security. The pattern continues as that original cluster of risky mortgages is continually re-packaged and re-sold, combined in credit default swaps and collateralized debt obligations, and traded among hedge funds and other institutional investors.
There needs to be a regulatory entity capable of riding these flows of capital in a systematic way, following them as they move from one type of financial institution to the next and transform from one kind of financial instrument into the next. There needs to be a government agency that can take a strategic view of market dynamics, and head problems off at the pass. There needs to be an organization whose oversight does not impose an onerous burden on the financial institutions it regulates. There needs to be a US equivalent to Germany's Federal Financial Supervisory Authority, Japan's Financial Services Agency, and the United Kingdom's Financial Services Authority. There needs to be an intelligent combination of the Securities and Exchange Commission, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Commodities Futures Trading Commission, the Federal Deposit Insurance Corporation, and other existing agencies. In short, there needs to be a Department of Economic Security.
Copyright 2008, John Hearn
No comments:
Post a Comment