It wasn't part of the stimulus package, but President Obama's financial reform could turn out to rank among Washington's biggest job-creation programs.
One contributing factor in the financial meltdown has been a patchwork regulatory system with wide gaps exploited by companies like AIG, Countrywide Financial, and many of Wall Street's biggest firms. Hardly anybody thinks the system is too small. In fact, it's a sprawling regulatory regime with at least eight federal agencies, plus bank, insurance, and securities regulators in most of the 50 states and industry groups set up to police their own members. In terms of bureaucracy, oversight of the financial system rivals that of Big Pharma, the auto industry, and other heavily regulated parts of the economy.
Economist James Barth of the Milken Institute has put together this handy slide showing the overlap among all the different organizations that were supposed to be safeguarding the financial system:
The problem, obviously, isn't the number of agencies assigned to regulate various portions of the financial industry. It's the efficiency and effectiveness of the regulation. One reason AIG cratered, for instance, is that its principal federal regulator was the Office of Thrift Supervision—whose main purpose is to oversee savings and loan institutions. AIG was a vast, global financial conglomerate, not an S&L—but it bought a thrift a few years ago, allowing it to choose the OTS as its federal regulator. The OTS, however, has no jurisdiction over the kinds of derivatives and other complex securities AIG was peddling. That produced precisely the kind of hands-off regulation AIG wanted. Unfortunately, AIG did a disastrous job of regulating itself.
Obama's reforms are supposed to end the kind of "regulatory arbitrage" that AIG practiced and plug a bunch of other holes. The Federal Reserve would gain the power to take over big financial conglomerates at risk of failing, the way the FDIC now seizes insolvent banks. A new Consumer Financial Protection Agency would regulate financial products, along the lines of the way the Food and Drug Administration operates. There would be new government czars overseeing banks and insurance companies. And a new Financial Services Oversight Council would coordinate action among the entire regulatory apparatus.
It might be meaner, but Obama's proposed regulatory regime definitely won't be leaner. There would be at least four new federal agencies, plus new layers of oversight that some states are instituting. Barth offers a new org chart, with the additional agencies drawn in:
The only agency Obama wants to kill is the OTS, with the firms it regulates folded into the portfolio of other regulators. That will leave at least six federal agencies to regulate banks. The strategy seems to be a kind of regulatory saturation ensuring that some agency, somewhere, will be responsible for just about every bit of activity throughout the financial industry. That's probably better than the leaky system we have now, but redundant bureaucracies tend to generate their own set of problems. Those bankers who believe their industry can regulate itself better than the government don't even get a hearing today. Five or 10 years from now, they might have a stronger case.