Rolfe Winkler has the details of the way in which both Sheila Bair and John Dugan are continuing to criticize Treasury’s regulatory-reform plan in Senate testimony today, even in the wake of Geithner’s now-famous tantrum. But what’s weird is the way that Bair, in particular, is getting explicitly political:
In light of these significant [regulatory] failings, it is difficult to see why so much effort should be expended to create a single regulator when political capital could be better spent on more important and fundamental issues which brought about the current crisis and the economic harm it has done.
The fact is that judgments as to where political capital can be best spent are political judgments, made in the White House. It looks a little odd for Sheila Bair to essentially be giving advice to Rahm Emanuel on such matters, and even odder for her to be using the vehicle of Congressional testimony to do so. If Geithner’s blow-up was a result of his seeing an advance copy of Bair’s testimony, you can see where he was coming from: Bair is treading well outside her own turf here.
Bair is right that the distinction between federally-chartered and state-chartered banks was not a proximate cause of the financial crisis — but that’s no reason to abolish a distinction which does little more than allow powerful banks to pick whichever regulator they think will smile most benignly on them. It’s a bit like high-frequency trading: Just because it didn’t cause a lot of harm during the crisis doesn’t mean it won’t be responsible for great harm at some point in the future. We don’t know, and it’s generally best to cut off such possibilities before they turn into extremely unpleasant reality.