WASHINGTON — What does it tell you when banks, investment houses, insurance companies and derivatives traders are so pleased with their regulators that they are prepared to pull out all the stops to keep them?
What it tells me is that the current system of financial regulation has been thoroughly captured by the companies it was meant to restrain — and that the only way to put things right is to bring in new rules, a new structure and tough new regulators. Anything short of that, and you can almost guarantee that the inmates will be back in charge of the asylum by the time the next bubble starts to develop.
Judged by that standard, the proposals the Obama administration put forward last week to reform the regulatory apparatus were a bit of a disappointment.
If you have to set up a council of regulators just to harmonize the rules used by different bank regulators, why not bite the bullet and consolidate them into a single agency?
Is there any reason ratings agencies should continue to be paid by the companies that issue securities rather than the investors who buy and trade them?
And is it too much to ask that, in a globalized economy, banks and insurance companies engaged primarily in interstate commerce be required to get federal charters and have federal officials as their primary regulators?
Given that we have just gone through the worst financial crisis in 75 years, one would hope that the government's response would be something more than an exercise in political triangulation.
It should have been grounded, first and foremost, in a thorough and independent analysis of how the crisis was allowed to develop and what regulators did and didn't do to prevent it, followed by a detailed set of recommendations from a panel of seasoned regulators and independent experts.
If Congress decided to deviate from those recommendations, of course, nobody would be surprised. But at least it would have given the public a marker for reform that was free of industry influence.
Instead, the Obama team, hoping to ride the wave of public outrage before it crested, determined to fashion a reform proposal even before a thorough analysis could be completed. And by deciding to contort and trim their proposal to accommodate the objections from powerful interest groups, members of the Obama team have made it politically acceptable for everyone to treat this as another special-interest free-for-all of the sort that helped cause the crisis in the first place.
It is no coincidence that this crisis developed while the Fed, the Treasury and other agencies were headed by people who were responsive to Wall Street and believed deeply that markets should never be second-guessed by government bureaucrats. And the bureaucrats proved to be exquisitely sensitive to the signals they received from above.
The best way for Obama to change that and avoid the next crisis is to appoint tough and independent regulators who understand that their role is to protect markets from their own excesses while protecting their agencies from being captured by the companies they are meant to oversee.