Government Accountability Is the Key to Regulating Banking

The problem with the banking regulatory system that needs to be fixed is that regulators aren’t held responsible when they do a bad job. Obama’s focus on new legislation doesn’t do a lot to promote government accountability and takes the spotlight off leadership problems that exist within the various regulatory agencies.

The Obama legislative proposals seem reasonable but then again, while there are statutory gaps that need plugging, I don’t see a need for massive new regulation. If anything there are too many rules and regulations, but too few that are intelligently enforced. Instead, the success of Obama’s reform effort will turn on whether or not regulators appropriately enforce the rules, become overzealous and strangle the system or go back to looking the other way and, at times, facilitating illegal and immoral conduct.

The culture that Obama has to break condones regulatory freelancing. Most recently, appointees experimented with the theories of “self regulation” and “self enforcement” despite no statutory authority for either theory. Over the last 10 or so years agency heads made up their own version of U.S. law when they decided to try out self regulation and enforcement rather enforcing what Congress mandated. Just as Federal Judges shouldn’t legislate from the bench by reinterpreting laws to suit their political views, agency heads shouldn’t push their own social, economic or political agenda by reinterpreting the law.

The problem of non-enforcement of unpopular laws isn’t a Democratic or Republican issue. Alan Greenspan believed that the Federal Reserve didn’t need to worry about bank safety and soundness, despite its statutory responsibilities as the primary regulator of bank holding companies. Greenspan was non-partisan and freelanced during both Democratic and Republican administrations.

There are “green shoots” of accountability that indicate President Obama expects senior officials to be both professional and responsible.

Early changes at the SEC indicate that the top capital markets cop is on the beat and starting make sure that the capital markets are free and fair.

The move by banking regulators to reintroduce capital rules and safety and soundness regulation is a clear break from the past laissez faire policies.

But, it won’t be easy for President Obama to hold appointees accountable. Washington institutions are going to fight back. The resistance to Obama’s firing of Inspector General Walpin shows how hard it is to change the culture. President Obama fired Walpin because he lost confidence in the Inspector General. Apparently there were a lot of reasons for Obama to lose confidence.

According to ABC News, an Acting US Attorney referred Walpin for disciplinary action because of allegedly biased and unprofessional behavior. And, there are many reports that Walpin allegedly showed up for meetings unprepared, confused and disoriented. Both his Democrat and Republican bosses strongly support Walpin’s dismissal. And, to top it off, Walpin admitted on FOX News that he works from home most of the time which means that despite having an important job and being a senior manager, Walpin didn’t find it important to actually come to the office. If the establishment finds it hard to hold Walpin accountable, it is going to be very rough sledding as Obama changes the overall regulatory culture.

While I don’t agree with everything that the President has proposed in his legislation (and will discuss concerns that I have within the next few days), I think that the proposals are generally pretty good.

But, a good plan that is badly executed just won’t work and the main focus of the Obama Administration has to be competent and non-partisan execution of his plan. The government needs to affirm its mission to enforce the rule of law and to hold regulators accountable for doing their job.

Comments

[Troy Ounce:]

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Jun 22 07:14 AM