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The Wall Street Journal

The Real Danger of 'One Big Regulator'

Financial regulation is the next item on the political horizon, and it doesn't have to be the deathly dull wonk-battle that it sounds like. In fact, if the Democrats do their job, it can just as easily become a platform for addressing the greatest issues of them all.

Our current way of regulating the financial system is dysfunctional. Oversight is dispersed among numerous confusing bodies that at times have seemed to be racing each other to the bottom. Setting up One Big Regulator would end that problem.

The Obama administration's plan is to have the Federal Reserve regulate banks that might pose a "systemic risk" if they were to fail. Critics suggest the Fed is too close to the banks that it would be charged with cracking down on. What's more, the Fed's main task is monetary policy, so regulating banks would never receive the attention it deserves.

Let me add another objection: What if some future administration were to install as the chairman of the Federal Reserve-or as chief of whatever agency is made into the One Big Regulator-a man who really doesn't believe in the regulatory mission? What if control of the systemic regulator is handed over to a person who considers 19th-century economic arrangements to be a sort of aspirational ideal? A man who turns out to be a dedicated fan of Ayn Rand, that Nietzsche of the boardroom? A man who blows off warning signs because, in his perfect theoretical universe of rational markets, the only really systemic problem is government itself?

I raise this potential problem because, from 1987 to 2006, that's pretty much the sort of man who headed the Federal Reserve. Had Alan Greenspan somehow been handed the One Big Regulator job back in those days, we might have had no real financial regulation in this country at all.

Consider the astonishing ideas about fraud that Mr. Greenspan once reportedly expressed. According to a Washington Post interview earlier this year with Brooksley Born, the former head of the Commodity Futures Trading Commission, in 1996 Mr. Greenspan "explained [to her] there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him." Later on, Ms. Born proposed that the U.S. regulate certain financial derivatives; Mr. Greenspan was influential in stopping her.

Could a Fed chairman do otherwise? As economist James K. Galbraith has pointed out, they are usually chosen "from among people who are close to the banking industry and to the financial sector." They can hardly be expected to be enthusiastic regulators of the same.



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As Fed chairman, Mr. Greenspan also worked to head off regulation of hedge funds. He waged war against the Glass-Steagall Act. A 2004 Wall Street Journal profile of Mr. Greenspan, subtitled "The Deregulator," described his Fed's fondness for bank mergers and then included this critical passage: "Critics say these mergers concentrate financial risk too heavily in a few institutions. Mr. Greenspan argues that deregulation also produced a more stable financial system."

Did the nation ever rise up to tell The Deregulator to get with the program? No. Our consensus opinion leaders virtually worshiped the man. In 1999, he made the cover of Time magazine as part of a "Committee to Save the World." His biography, a classic of Washington-style power-palaver, was written by Bob Woodward, who dubbed Greenspan the "Maestro."

Why rehash this embarrassing stuff? Because judgment day for this particular form of wrongness has never really come. Yes, Mr. Greenspan himself has changed his ways: He uttered a famous mea culpa in October 2008, at the very pit of the crisis; of late he has even seemed to call for some kind of breakup of the "too big to fail" institutions.

Out in the consensus world that made a god of Mr. Greenspan, though, the deregulatory faith has never really been challenged. And until it is-until the bad ideas themselves are confronted-the best-designed regulatory institution in the world will go awry. It will merely become a fat target for the next bunch of "market based" politicians to come down the pike.

Taking on the consensus ideas of the past few decades is not a task for a happy bipartisan administration. It is not something that can be done by triangulation. What's more, it will require Democrats to align themselves openly with government, a posture they are loath to strike in these cynical days.

On the other hand, President Barack Obama has often spoken about a politics that transcends the culture wars, and this issue might just be the way to start building a new coalition around economic issues. Besides, the Republican leadership has made it easy for him, betting everything on the absurd notion that more government automatically equals less freedom. With a little skill, the boring issue of financial regulation could become their Waterloo.

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