It’s generally not a good sign when a regulator exhibits distaste for his job.
Recall that Federal banking supervision takes place through a variety of channels, but the main actors are the Fed and the Treasury, through the Office of the Comptroller of the Currency and the Office of Thrift Supervision. So Treasury Secretary Hank Paulson’s views on regulatory changes are to be taken seriously.
A New York Times story today reports that Paulson has cautioned against a rush to introduce new regulation in the wake of the credit crisis. And narrowly speaking, he is correct. As we have stressed, this is a problem with many moving parts, and it’s important to have a good understanding of the causes and dynamics before determining how best to design reforms. Unfortunately, too many good minds are fixated on monetary policy, not on the tougher problem of regulatory change.
But Paulson’s remarks sound more like they come from someone who has an antipathy for regulation than one who recognizes not only the need for, but also the benefits of, well-crafted rules:
The United States Treasury secretary, Henry M. Paulson Jr., said Monday that turmoil in the world’s financial markets could continue for some time…..
He also warned that imposing new regulations could be counterproductive at a time when the global economy remains robust.
So when is a good time? When growth is weak, industries object to the imposition of new requirements, arguing that the cost of implementation will further depress their low profits.
Another troubling section from the story:
“The whole world and the U.S. have benefited from innovative financing techniques and innovation in terms of securitization and credit availability, and so we need to think this through carefully and don’t rush to judgment and overreact,” Mr. Paulson said. “We have to get the balance right.”….
Asked whether it was a lack of regulation that precipitated the current market situation, he said, “History says it’s very difficult for policy to keep up with innovation.”
Paulson’s views belie his long tenure in the securities industry. It isn’t simply populists that are questioning the value of financial innovation; even those sympathetic to the financial services industry see its pitfalls. And Paulson’s “the whole world and the US have benefited” is a stretch. At this juncture, it looks like the innovators benefited and everyone else did well if they came out even.
While Paulson’s objections may be sincere, they could just as easily be a delaying action.
And he is blind to the inconsistency of stressing the need to go slowly while admitting that regulations typically fail to keep pace with innovation. That would seem to call for a need not just to draft new provisions, but also to devise ways for regulators to develop new rules faster, say by doing a better job of keeping up with new products and accelerating the development of new rules.