Eisinger On Regulators

We were big fans of Portfolio’s Jesse Eisinger even before our Audit interview with him last month (a must-read for biz journos and their readers, in our view).

Today, he gets an Audit hat tip for his latest column, “First, Fire the Regulators,” not just because we agree that the regulatory system needs major overhaul, but for his historicism, which we always like. Eisinger dug into history to good effect in a column last year that discovered how ratings agency conflicts of-interests got started.
It seems like an obvious journalism strategy to look backwards for useful analogies to today’s problems, but how few people do it.

In the new piece, he looks into calls for reform that followed previous financial crises,—events that look small compared today but were a big deal at the time and which provided made-to-order warnings for the markets and policymakers, who duly ignored them.

After 1987:

George Soros, not yet the bête noire of right-wingers, took to the editorial page of the Wall Street Journal to warn that nobody was thinking big enough: “The longer markets function without supervision explicitly aimed at maintaining stability, the greater the danger of an accident like October 19, 1987.

Anyone remember the landmark 1987 Securities Act? It never materialized.”

And then eleven years later:

And did anything happen in 1998, after Long-Term Capital Management nearly went under and a similar dance took place? Many of the same players strutted on the same stage, and Soros again predicted that without sweeping international regulatory reform, we risked “the breakdown of the gigantic circulatory system which goes under the name of global capitalism.” Again, no ’98 Securities Act—perhaps not surprising, given that what followed was a market recovery that we now know was a massive equity bubble.

Kudos also for reminding us that Soros, despite efforts to marginalize him for his progressive politics, has proved as wise a policy-thinker as he is an investor, even though the former field is a hobby for him.

I don’t have the expertise to judge whether, as Eisinger says, the current agencies should be scrapped, the Fed stripped of its regulatory powers, or a “twin-peaks” approach should be instituted (true, I rarely let a lack of expertise get in the way of a firey opinion, but I’m feeling modest today). The twin peaks idea, a foreign notion proposed for the U.S. by Hank Paulson, apparently, would have one agency look after solvency, another look after compliance and enforcement. As Eisinger writes:

The Twin Peaks model has good-cop, bad-cop appeal. The safety-and-soundness regulator can work with firms to make sure they are solid or else the enforcer will come in. And we should consider a third peak as well: one with responsibility for surveying systemic risk. It would monitor the safety and soundness of the entire financial system, rather than assess it on a company-by-company basis.

Sounds good.

One disagreement: He describes the S.E.C.’s timorousness in recent years as an attitude problem.

First, regulators need to change their ninnyish attitudes. They have gone about their jobs in the past decade like hall monitors at the prom, deeply afraid of being ostracized. They need to bring some mettle to their roles. The challenge is to remake the system so that it’s up to the task of preventing, or at least minimizing, the next global meltdown. Alter the structure all you want, but unless you have the right regulatory attitude, it’ll be for naught.

I’m afraid this ignores the political/ideological dimension. We’ve had a party in power openly hostile to government regulation. It’s pretty simple. It’s a political question. Attitude starts at the top.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.