In testimony today before Congress, Fed Chair Ben Bernanke outlined his reasons why the Federal Reserve is uniquely suited to be the regulatory supervisor for U.S. banks.
Bernanke offered two reasons why the Fed is the natural agency for financial supervision. First,
he suggested that some supervisory responsibilities are essential in order for the Fed to carry out its primary monetary policy functions:
[The Fed’s] involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve’s ability to effectively carry out its central-bank responsibilities. Perhaps most important, as this crisis has once again demonstrated, the Federal Reserve’s ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has as both a bank supervisor and a central bank. Not only in this crisis, but also in episodes such as the 1987 stock market crash and the terrorist attacks of September 11, 2001, the Federal Reserve’s supervisory role was essential for it to contain threats to financial stability.
Insofar as the Fed is expected to fulfill its function as a lender of last resort through the discount window, surely it needs detailed knowledge of the borrower’s financial situation. And actionable information on the financial system’s health and stability is just as surely essential for knowing when and how fast to change interest rates.
Second, Bernanke observed that no other agency has the Fed’s breadth and depth of relevant expertise:
Federal Reserve staff members have expertise in macroeconomic forecasting for the making of monetary policy, which is important for helping to identify economic risks to institutions and markets. In addition, they acquire in-depth market knowledge through daily participation in financial markets to implement monetary policy and to execute financial transactions on behalf of the U.S. Treasury. Similarly, the Federal Reserve’s extensive knowledge of payment and settlement systems has been developed through its operation of some of the world’s largest such systems, its supervision of key providers of payment and settlement services, and its long-standing leadership in the international Committee on Payment and Settlement Systems.
The Fed employs hundreds of extremely bright and very well-informed economists. On my visits to the Federal Reserve, I’ve been amazed at how well the staff work together to assimilate information and perspectives. In my experience, you can ask any one of them a question about pretty much anything, and although the person you’re talking with may not know the answer, he or she will know the name of the person within the Fed who does know. I’ve interacted with lots of different institutions over the years, and have never seen another one that functions so effectively as a single, cohesive neural processor. Certainly the objective record of Federal Reserve forecasts is pretty impressive; see for example the assessments by Christina and David Romer and Faust and Wright.
Doubtless others will be skeptical, trotting out the Fed’s spectacular underestimation of financial problems during 2005-2007. That criticism is of course well taken, and both the Fed and the economics profession as a whole have much more work to do in terms of recognizing exactly what should have been done differently. But let’s be practical. What other institution did a better job? Where in Washington today do you see an agency with the intellectual resources to get this right? Simply squawking that we need a change is not constructive leadership; it’s political finger-pointing and CYA.
Indeed, it’s striking that many of those who were instrumental in relaxing the oversight on Fannie Mae and Freddie Mac now believe that a regulatory body more directly under their political control could do a better job than the Fed. In the mean time, the FHA continues even today to dig us into a deeper hole.
Notwithstanding, the debacles of Fannie and Freddie and the perhaps soon-to-come trainwreck from the FHA also illustrate the primary concern I have about giving the Fed more supervisory authority. The more power the Fed is given in such matters, the greater the political pressures will be from the outside to satisfy certain constituencies, and the less the Federal Reserve will resemble the remarkable institution that Bernanke and I described above.
It appears that the Fed didn’t do a very good job of figuring out what was going on at Lehman, even when it was supposedly keeping a close eye on them.
The Fed has a lot of expertise, but not necessary the correct expertise or the correct mindset to be an effective regulator. Maybe they could be, but there isn’t tons of evidence.
There is a MASSIVE problem with having the Fed regulate banks. The academic economists control the place, and are anti-regulation and ignorant of the law.
Bernanke, Kohn, Yellen, Romer, Summers, and co make baseless assertions about using bankruptcy to reorganize banks, which clearly establish they are ignorant of the tools they had to restructure big financial groups in 2008 without bailing out big bank creditors. If they had ANY legal support for their IGNORANT assertions, they would cough up the legal opinions the NY Fed and Board of Governors received on using bankruptcy. Most likely, they got NO LEGAL OPINIONs, and are BASELESSLY asserting bankruptcy couldn’t be used in order to justify their either paniced and/or corrupt bailout activities.
Kohn, Geithner, and Bernanke aided and abbetted securities laws violations by helping big banks move garbage off their balance sheets at quarter ends, to avoid reporting on Q’s and K’s.
The perfect example of the anti-regulation and legal ignorance inside the Federal Reserve was the WSJ’s recent walkabout tour interviewing examiners who are basically viewed as unwanted step-children by the fancy pants economists in charge of the Fed.
The Fed’s regulatory responsibilities are in conflict with its role in expectations setting.
The Fed actively tries to manage expectations for recovery and inflation. During 2007 and 2008, it was in the Fed’s interest to downplay the risk to the financial system, as it was fighting the self-reinforcing dynamic of asset sales which might lead to deflation, and therefore threaten price stability.
So there was a situation in which the Fed was supervising an institution like Lehman, and at the same time quashing deflationary fears. So given this tension between policy goals, what are the chances that the Fed would exercise its supervisory authority and force Lehman, more or less publicly, to reduce its risk profile? In fact, we know now that the Fed was aware that Lehman was failing progressively weaker stress tests, and yet did little to change Lehman’s risk posture.
In a crisis, how can you publicly exert regulatory influence while at the same time fighting deflation expectations? The answer, I suppose, is don’t get into a crisis in the first place…
Dr. Hamilton –
I share your regard for the competency of the economic staff in the Federal Reserve System. However, to serve as an effective regulator, it has to play the role of an effective enforcer, with a clear long term strategy. Recent actions by Greenspan and Bernanke, have been tactical, putting out the latest fire, while leaving the forest full of gas-cans and chain-smokers. What is needed is a long-term strategy to limit credit growth relative to the tradable output of the economy, insistance that all financial contracts involving financial institutions be public, that security laws are enforced and that captalization and reserve ratios be maintained at high levels.
Regardless of the intellectual merits of the FED staff, there is a very strong conflict of interest involved in the ownership and governence of the FED. The banking system and especially the primary dealers maximize their rent on the productive economy by minimizing bank reserves and capital requirements, while sanctioning the proliferation of securitization and derivative instruments. Because the ownership and the boards of the FED is controlled and populated by bankers, it’s natural that decisions will be made to increase bank profitability… essentially by increasing instability and risk.
America has plenty of institutional problems with regulation. Why is it a good idea to enlist the foxes to guard the sheep?
The FED has been smart enough for most of its tenure to show a humble public face and limit both its activities and its forays into public policy. I believe the institution did this to protect America’s plutarchy and the FED’s special relationship. Perhaps in the long run, charging the FED with regulatory responsibility is the best way to sever privileged control of the currency. In the short to medium term, it will likely imperil us more.
I totally agree with Senator Dodd that the Fed’s supervisory performance is abysmal. For one the Fed is very ideological. If Chairman Greenspan opined that there was no bubble then bank examiners could just sit on their hunches. But more importantly the Fed is very conflicted. At times banks’ wild lending make the Fed’s jobs of stimulating the economy a lot easier and they have incentives to turn a blind eye towards unsafe banking practices. Their resistance to consumer protection is exhibit number one in that regard.
The senate bill’s division of labor is rather logical. FDIC is the one to take first loss from bank failures so they can trusted to regulate the small banks. The TBTFs by definition won’t fail (and won’t cost the DIF) so the Fed can stay the regulator of those and that is probably sufficient for information gathering purposes. If they are more focused they might do a better job next time.
Dear professor I highly doubt that you interact with bank examiners much on your visit to the Fed. And we all know where model driven eggheads led us to with all their brilliance.
Yes Congress acted recklessly through Fannie and Freddie, but no other than the great Greenspan himself all but endorsed it by pronouncing that there was no housing bubble (supported by numerous studies by his brilliant staff, doubtlessly). MEW made the Fed’s job a lot easier and made the Fed look brilliant for a while, didn’t it?
I agree with Stiglitz’ conclusion, that the governance structure of The Fed poses obvious and serious threats to its ability to meet its statutory obligations:
http://www.huffingtonpost.com/2010/03/03/stiglitz-nobel-prize-winn_n_484943.html
No way does The Fed deserve to keep its oversight roles, given its conflicted governance structure and its terrible track record over the past 10 years.
Structure and incentives matter, Professor.
“It appears that the Fed didn’t do a very good job of figuring out what was going on at Lehman, even when it was supposedly keeping a close eye on them.
The Fed has a lot of expertise, but not necessary the correct expertise or the correct mindset to be an effective regulator. Maybe they could be, but there isn’t tons of evidence.”
If the Fed is the problem replace the Board of Governors when their terms expire. The same goes for the Chair and the Vice Chair. The answer is not to create another regulatory body under the sway of political pressure.
On one hand the fed has demonstrated an unwillingness or inability to regulate misbehavior, by recognizing it beforehand or by punishing it afterwards.
Same with the SEC.
Same with FASB.
On the other hand, I don’t like the odds that some new body will be more aggressive or less corruptable over the long haul.
The department of homeland security is my model for new bureaucracy. Redundant with the CIA, FBI and DoD- loading the same “feet on the ground” personel with extra reporting tasks but spending its money on “rump on the chair” personel to lobby and expand. And escaping the shoe bomber and underwear bomber only through luck.
Account for the corrupt system in place by weighting financial bets acordingly. Thats the free market at work.
In my opinion, some of the above comments (David Pearson, HZ) are confusing the current political landscape with the political (and legal) landscape prior to the crisis. There was no reasonable way for the Fed to “change Lehman’s risk posture” — it was an investment bank, not a bank-holding company, and the Fed did not have the tools or authority to affect this kind of change. This is the reason that macro-prudential supervision (whatever that exactly is) is discussed actively, for instance in today’s FT by Viral Acharya from NYU. Presumably, this supervision would allow an agency like the Fed to enforce changes to financial institutions’ risk profile. But I simply don’t see how that could have been done back then.
There is an undercurrent of dissatisfaction with the financial crisis’ handling that a vocal group has channeled into blaming the regulatory structure. When this blaming is unreasonable, it is like blaming laws for the crimes people commit. But it takes two to make the crime happen: the law that says the action is a crime, and the criminal to commits the deed. Those hundreds (thousands?) of mortgage brokers who gave no-doc loans had a hand in what occurred. And indeed, investment bankers who essentially banked on public safety-nets had a hand (which is in the same spirit as Acharya’s last paragraph).
On the other hand, there is plenty of room for reasonable criticism of the regulatory structure. Understanding how the Basel accord mis-targets capital requirements, or how the Federal Reserve did not adequately understand (and thus push for more oversight of) new financing arrangements in the repo market that had supplanted traditional bank lending: these are important topics for discussion and places where regulators failed.
People who stand amazed that regulatory structures are circumvented by new forms of human activity surprise me. People are creative. That is the reason for the numerous asset return predictability papers that have been written over the years, and also the reason that much of the found predictability vanishes after the paper is published. People evolve. Regulatory structures play catch-up. But those structures are only improved by sober analysis of where they went wrong, not vociferous assertions that they could have stopped the problem.
Finally, in response to joe: I personally find it comforting that a regulatory institution (whose power increases as it regulates more) would have a culture that is wary of regulation. I suppose that is more a political opinion on my part, though. And in response to the bankruptcy laws: have you been paying attention to the lengthy judicial process dealing with Lehman’s dissolution? Seriously that LEGAL PROCESS is taking a LONG TIME TO UNWIND. I bet Bernanke and co foresaw that.
Because without it he might not be able to create a depression to study?
Professor,
What do you think of an organization that will totally control the money of a country that is totally beyond the control of the people? I guess I am asking your opinion on democracy?
Our forefathers who created this country understood that it was important to control the power of government. What greater power can be given than complete control over money and banking? What greater danger to have an institution that is totally private and hidden with no input by citizens controlling money and banking?
It appears that we are quickly creating Plato’s Gardian class to rule our lives. How frightful!
SJP says, Finally, in response to joe: I personally find it comforting that a regulatory institution (whose power increases as it regulates more) would have a culture that is wary of regulation. I suppose that is more a political opinion on my part, though. And in response to the bankruptcy laws: have you been paying attention to the lengthy judicial process dealing with Lehman’s dissolution? Seriously that LEGAL PROCESS is taking a LONG TIME TO UNWIND. I bet Bernanke and co foresaw that.
That is totally unacceptable. Massive energy trading companies have been resolved in chapter 11. There is no technical reason that Lehman, Goldman, JPM, BAC, MS, and all the other troubled big financial groups couldn’t be resolved in bankruptcy, with the Fed providing operating financing as a lender in the bankruptcy taking a senior loan interest.
The ONLY impediment was that Geithner/Paulson/Bernanke view the banks’ managers as their CLIENTS/CUSTOMERS. That is CORRUPT.
Unless the regulators have the brass balls to resolve ALL troubled financial entities WITHOUT EXCEPTIONS — PERIOD — in bankruptcy. Then I want those banks regulated as tightly as a baby food manufacturer. It is illogical — and evil — for the NY Fed to refuse to regulate bank activity and then provide bailouts.
And if the regulators need incentives to do their job, we ought to impose CRIMINAL penalties on regulators for bailing out banks, say 10 to 20 years in prison and fines of 5 to 10 million dollars.
sjp,
You may be right technically, but certainly not practically.
As a market participant, and one that was quite short Lehman during most of 2008, it was clear to me that they had excessive risk on their balance sheet, and that this was enabled by the buyers of their short term debt. The Fed had months after Bear Stearns to go to Lehman and say, “if you don’t take on longer term funding (at a higher price) or sell assets to raise cash, we will ask you to do it publicly.” The fact is, instead they went around saying publicly that the problem was “contained”, which by implication SANCTIONED the buying of Lehman’s short term paper.
Again, as someone that witnessed the power of the Fed to sway markets during the Greenspan and early Bernanke period, the claim that the Fed was “powerless” to effect change at the Lehman’s of the world is naive in the extreme. Perhaps there was no resolution authority, but that is not the point; the point is what the Fed should have tried to do prior to the need for resolution.
I believe the Fed did what it did — nothing — as a regulator because it was fighting deflationary expectations.
BTW, above I say the Fed sanctioned the buying of Lehman short term paper. This may seem an extreme view. However, look at the facts: 1) the Fed bailed out Bear’s short term debt holders; 2) the market had reason to believe the Fed would therefore bail out Lehman’s; 3) the market knew Lehman was heavily levered; 4) the Fed said nothing about this leverage even though, in the market’s eyes, it was “on the hook” for a bail out. Therefore, one could conclude that, in the market’s eyes, the Fed was comfortable with Lehman’s leverage.
After the fact, the Fed made the claim they did not have the authority to bail out Lehman’s creditors. Before the fact, you would have been extremely hard pressed to find a Wall Street trader that believed that.
I agree with Pearson. The Fed was fighting deflationary expectations — without regard to the distributional consequences. Forcing a controlled chapter 11 bankruptcy of the big banks would have resulted in massive redistribution of wealth from the top 1% of the population (which holds a vastly disproportionate share of financial assets) to the rest of the population. That choice was a betrayal of the Fed’s duty to the public, and is unforgivable.
I feel honored to post on the same blog as Pearson if he is the ex-CEO of NXT.
All they have done for us so far is convert a high speed train wreak into a slow speed train wreak.
I find the admission by the Fed that they “may have made a little boo-boo in 2005-2007” to be a case of extreme understatement. But at least they stopped saying it was “regulatory failure”, like the FDIC was supposed to be regulating Citi, BA, etc. Let’s not ignore the fact that the IBs grew too big to fail and too interconnected, but no one thought that could be a problem, and finally even now the Fed states “lack of resolution authority” is the big problem.
When there is systematic meltdown, the Fed and/or Treasury would need to supply cash to make the system nearly whole again, and THAT IS the problem. Whether it’s handled as bankruptcy, or uses the magical financial powers of government, there is too much bad debt for the system to absorb. Of course the board of the NYFRB may think that is the way to go. Ask Jamie Dimon if he wants his stock to be worth something.
As to the economic brilliance of the Fed, I remember lots of people questioning Greenspan about the explosion in teaser rate loans in 2004, and whether that should be allowed (remember Greenspan was our consumer protection provider at that time). Greenspan replied, “if you don’t take out a variable rate loan, then you are paying too much for interest!”, and then started raising rates a few months later. Financial Adviser consulting like that should get your license revoked, but it makes you brilliant if you are the country’s head economist of a staff of hundreds????
So now Benron wants to take over the FDIC???
He also said he thinks we can move to zero reserve banking??? Is he trying to be funny????
Sure the GSEs are a huge problem too. Pick your poison.
at the end too big too fail will be the major reason to cause the sovereign debt crisis in US without doubt. Now too big too fail create the over risk taking in too big banks and the manipulation in the market will cause the mispricing and the large price swing will cause the crisis in banking sectors. Surely if too big too fail still stay, the government will be responsible the huge debts and the sovereign debt crisis will happen in US. I am not sure is there anyone trying to solve this problem?
Young Economist,
“Surely if too big too fail still stay, the government will be responsible the huge debts and the sovereign debt crisis will happen in US. I am not sure is there anyone trying to solve this problem?”
I think that is the “slow speed train wreak” part. The problem is they are stuck…de-leveraging will be bad for the economy, and there is the potential for the classic Irwin Fischer “debt deflation spiral”. So the government will try and buy all the bad debt, because you can’t sustain capitalism if all the capital disappears. But the magical powers of government finance have their limitations too….
I beginning to think we should wish for a “Japanese” outcome. It may be the best possible scenario.
None of the discussion here, including Jim’s original remarks (or what is quoted from Bernanke) focuses on what is probably the most controversial aspect of Dodd’s proposal, which is to specifically remove supervisory oversight responsibility for smaller, local banks from the regional/district Fed banks. This would be posited into a body that would be located in and funded by the Board of Governors in Washington, although not under its authority, although the NY Fed would gain some regulatory authority, with its president becoming a presidential appointee.
I see nothing good served by this removal of function from the regional Feds. These banks were not the source of the problems, even if many are now suffering from having a lot of bad stuff on their books leftover from the crash of the real estate bubble. Indeed, as this reform proposal does not (and should not) remove the role of the regional bank presidents from their role on the policymaking FOMC and for those not voting members for reporting on economic conditions in their regions at FOMC meetings, I see them being cut off from important sources of information if they do not have this authority over the banks in their districts.
Indeed, Bernanke did mention this information issue in his remarks, although I did not see it being specifically tied to this matter of the proposal to remove authority from the regional Feds.
Barkley says, None of the discussion here, including Jim’s original remarks (or what is quoted from Bernanke) focuses on what is probably the most controversial aspect of Dodd’s proposal, which is to specifically remove supervisory oversight responsibility for smaller, local banks from the regional/district Fed banks.
I and others responded to Jim’s/Bernanke’s remarks regarding the Fed regulating small banks. I don’t want the Fed regulating ANY banks whatsover for the reasones I stated above. If the best I can get is stripping the Fed of power to regulate small banks, I’ll take that now. And come back for more later. After the next Fed fueled bubble of loose regulation and interest rates.
Barkley,
Great point!
Thanks for the heads up. I didn’t catch that in Dodd’s tome.
Institutions are run by people. People have incentives. What is the Fed’s incentive? It is credited with managing the macro economy (a dubious credit I may add). It didn’t care that what it was doing (encouraging a housing price bubble and MEW etc) was harming the least financially sophisticated in the country. And it is causing real damage — forget about financial damage which is zero sum — it is creating major friction in the economy when people are trapped in their homes not able to move to where there are jobs or better jobs; mis-allocation of resources with massive over investments in residential homes; and of course the collateral damages now from foreclosures. Now many of these consequences didn’t take a genius to foresee, but Fed was incentivized not to act, because the artificial boom made their goal of stimulating the economy easier. They also point to the security markets to justify their decisions. What they fail to recognize is that when the security markets are dominated by third party money managers (which BTW make the Fed much more powerful because of their short termism and their sensitivity to Fed signaling), these people’s motivation must be taken into consideration. The asset managers’ decisions may be rational from their personal perspective but not necessarily so from the perspective of their clients who bear the true risk. However Fed has the incentive to ignore that as well because its own power so much depends on these asset managers.
Institutional incentive is critical to understanding the regulatory capture we witnessed. OTS’s budget is dependent on fees it collect from the thrifts it supervises and it turned out to be the weakest regulator to retain/attract more banks/thrifts to its domain. FDIC is first in line for losses from failures and it traditionally is a lot more conservative. The Fed, despite its budgetary independence thanks to its monopoly on the currency, is conflicted in many areas (such as consumer protection) and its power is very dependent on the security markets dominated by third party asset managers.
I don’t think I can recall a time when the Fed’s credibility was at such a low point.
In David Pearson’s argument’s favor (and against mine) is today’s front page of the FT that claims Merrill alerted the SEC and NYFed about Lehman’s inappropriate treatment of repos in calculating liquid capital.
One question (to David Pearson and joe: how was the Fed’s inflationary stance (to counter the deflationary scare of 2003-2004, at least judging from the real time data) connected to their treatment of Lehman?
sjp,
The Fed was trying to promote credit growth in 2002-2006 through its “considerable period” and “measured pace” rate policies. While controversial, many believe that asymmetric monetary policy and the “search for yield” resulted in the unprecedented expansion in broker-dealer balance sheets (and off-balance sheet vehicles). So in a sense, Lehman was a creation of the Fed.
Step back and think about what the Fed is. An institution charged with maintaining price stability and a lender of last resort. As a price stability guarantor, it can and probably should do anything to shape price expectations. In a period of deflation risk, that means anything the Fed does to create expectations of a recovery or of financial system soundness is part of “doing its job”. At the same time, a regulator’s job is to deter and prevent excessive risk taking, even at the bottom of a cycle and regardless of the impact on asset market prices. How are these two objective compatible?
Is there increased IB competition for project yields when risk-free rates are low? I would think the proper metric for these NPV calculations is excess return (above the risk-free), and this might have little to do with to the level of the risk-free rate. This makes me think that IBs are competing with each other to the same degree regardless of the short-rate situation. Then the level of policy rates would have little to do with excessive risk taking. It would be the availability of these risky projects (which has to do with the regulatory structure). Thoughts?
sjp,
I think you have to look at whom the low rate policy was having a “rational” effect on.
There was some reporting in all the “kiss and tell” books that came out about how the IBs really operate, and evaluating credit risk did not seem to be something they concerned themselves with all that much.
There were some quotes from the IB types like “if you run 8x leverage or better, you can make good money” (by lofty Wall Street standards) on AAA debt even at the low longer term rates of the past decade.
In the case of subprime, there were reports that the IBs were actively canvassing the subprime originating banks and actually pressuring them to supply more “material” to the IBs so that the IBs could manufacture more “product”. The IBs (salesmen) also seemed to imply they did not really care about loan quality. So in this credit segment we had something like a “toxic waste factory”, not anything that would be considered within the realm of conventional economics, finance or monetary policy.
But macro-economists always pride themselves in being society’s psycho-analysts, and that they can read and manipulate our collective psyche and tune our collective behavior to operate in the “safe” economic range. (green to yellow zone) But then I always find that I need to remind macro economists of the three states of the collective psyche, which are… liquidity trap (the depression, or bummer zone), the happy zone (cost of credit/money matters because everyone is making rational decisions based on it), and finally the irrational exuberance zone, where anything can happen. (including what happens in Vegas doesn’t stay in Vegas but gets transferred to the Treasury or Fed balance sheet)
So I don’t think we can ignore the impact of monetary policy on creating the housing bubble thru irrational exuberance acting on prices and associated business decisions. (you can if you are Brad Delong in a recent post, but whatever)
The IBs became the conduit of credit to the subprime market. The GSEs had the rest well covered. They did not really have risk because they were all acting as origonators and made money from upfront transactions rather than holding the loans. Or so they seemed to think.
Enter the suckers. We were faced with the “Search for yield” problem, and low rates were forcing us to “take risk”, but in reality the risks were so obfuscated that no one knew how to quantify it and global liquidity just drove yield down.
Part of this was due to excessively loose monetary policy by all central banks. Part is due to the fact that the US seems to be the recipient of global liquidity. For a few reasons…dollar as trade currency, dollar as reserve currency, big trade deficit and surplus country savings are recycled back to the US, the GSEs are a global market for US mortgage debt, the widespread belief in the US taxpayers’ ability to pay back any sum of Treasury bonds issued, and lastly that short term repos (even from foreign banks so your Wall Street competitors DON’T get a peek at you books) are a perfectly fine way to fund both 40:1 leverage and your inventory of long term toxic waste that you haven’t found a buyer for yet.
So sound like a regulatory problem? How could it not be, at least except for the irrational exuberance part, but we are already up to ears in regulators.
There is the Federal Reserve, the OCC and the FDIC all charged with looking after national banks. State regulators look after state banks, and the Fed does have some of those as well, and FDIC is everywhere.
I even found a more detailed breakdown of regulatory authority here. Then of course Greenspan had the consumer’s back. And since when has Congress ever been shy about introducing new legislation?
http://www.pacb.org/banks_and_banking/regulations.html
So no shortage of problems or reasons to cite. And I didn’t even mention Congress and the GSEs yet.
Almost forgot one more thing.
You can “insure” it all with CDS. That was one “financial innovation” that Ponzi didn’t even think of. Enter regulation…a CDO plus CDS counts as AAA Tier 1 capital for banks…banks can make some interest on capital this way…what will they think of next?