Regulators had powers but chose not to do anything

Eliot Spitzer, former Attorney General and Governor of New York makes some interesting comments in this interview. On Obama’s new finance plan he says:

“Rearranging the deck chairs does not fundamentally alter the fact that the regulators had the power over the past few years.”


KATHERINE LANPHER: Hang on a minute, where were those tools that people could’ve used? There’s been a lot of reporting, for instance on the Office of Thrift Supervision, saying that in fact they didn’t have oversight over some of the areas like with the credit security departments.

ELIOT SPITZER: Unfortunately, those reports are wrong. If you look at what, and I hate to point back to the office when I was Attorney General a number of years ago, what we were able to do with a very simple fraud provision in a state law. We were able to delve into the fundamental financial workings of every one of these companies, from AIG to the major banks to the hedge funds on occasion. All you needed was a simple anti-fraud provision in a statute, and the Fed, the SEC, the OCC had all the power they needed to look at these entities and to set credit ratios, capital ratios, liquidity requirements. They just didn’t do it.

He says Fed has all the powers but the ideology of Mr G was just too strong:

KATHERINE LANPHER: You’re asking the question: “Where was the Fed?” What’s your answer to that?

ELIOT SPITZER: I think that they made an affirmative ideological choice not to intervene and we have now, and I remember when I read Alan Greenspan’s autobiography being amazed because here was somebody who was writing in these glowing terms about Ayn Rand and the notion that governments should never intervene in the marketplace, and yet the Fed is the fundamental most important regulator out there. It swamps the capacity of the SEC, and OCC, OTS, all the others. The Fed has the capacity to look at any entity on the street, and say to them, “You have too much debt, you have too much leverage, raise your capital ratios, or you won’t have access to the borrowing we authorize.”

His excellent suggestion for Obama:

I’m not there having crafted a specific alternative plan. I’m not going to pretend that I could, or I would, in 30 seconds on air. The one thing I would say would be put people at the Fed, put people at the SEC, who affirmatively want to regulate.

I think this is a very very important point (His anecdote on how OCC did not allow NY State to look at predatory lending and complex derivatives is quite interesting).

Seeing the vast literature on economics and finance, you hardly come across any papers strongly in favour of regulation. The regulators  are mostly trained with  the same kind of literature and even though they become regulators, favor for self-regulation is pretty strong.  There were hints in Enron crisis, dotcom crisis, LTCM bailout that self regulation does not work, but was ignored.  This crisis has ofcourse changed all this with mr G agreeing that he was mistaken and rest simply followed.

This is not just limited to US but common across economies and instiutions. As I pointed in this post, the key people believed something was happening but did nothing. Why? The main reason is their beliefs but I guess  financial oligarchy also had a chief role to play. After all, most regulators had prior experience in the big fin firms as well.

This crisis is not just ba plain case of economics going wrong. There are some interesting political nuances to it as well. It should lead to some great literature on political economy.

7 Responses to “Regulators had powers but chose not to do anything”

  1. Uk Financial Sector Fix Plan Version?? « Mostly Economics Says:

    […] the same thing – increase capital ratios, curb leverage, make regulation sharper with teeth (however it is more important to get people who want to regulate) etc etc. What is the point of having same reports over and over […]

  2. Reselience of Canada’s Banks « Mostly Economics Says:

    […] What is particularly interesting is that Canada also has a fairly concentrated banking structure (few banks hold majority of the banking share) but still managed to survive. It was mainly because of prudent banking policies which restricted usage of wholesale funding and curbed leverage. They had regulators who wanted to regulate. […]

  3. An overview of coordination in International Financial Regulation « Mostly Economics Says:

    […] on financial regulation. Infact, there is plenty of it and more is to come. The real issue is as Spitzer sums it – the regulators just didn’t want to regulate. The thinking was markets know the best, so […]

  4. Crisis of Capitalism or democatic system? « Mostly Economics Says:

    […] busy distributing bonuses and treating the crisis as a forgotten event. I firmly believe in what Spitzer says- you need people who want to […]

  5. Going back to Glass Steagall Act « Mostly Economics Says:

    […] policies. The crisis is just too big to ignore. Another lesson from this paper is the importance of having strong regulators. Otherwise, regulatory arbitrage and pressures would once again […]

  6. Evaluating financial stability reports « Mostly Economics Says:

    […] we need people within the central bank who look at financial stability seriously and want to act (and not just sit and talk) […]

  7. Financial regulation – first define the problem « Mostly Economics Says:

    […] pointed this a while back (who was also there in the conference). Lord Turner made a very honest speech […]

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