The financial system needs one very powerful regulator, says economist Mark Thoma, and that regulator should be the Federal Reserve. Thoma takes a look at Sen. Chris Dodd's proposal, which would combine the Federal Reserve, Office of Thrift Supervision, FDIC and Office of the Comptroller of the Currency.
Thoma likes Dodd's push to end regulator shopping, or arbitrage. It's just that Thoma think the logical approach is to give more power to the Fed and not to a new agency. He writes:
First, the agency in charge of regulating the financial system needs to be independent. For the Fed, there's a well-established tradition about what independence means, and that tradition has served us fairly well. The Fed also attempts to represent public, private, financial, and business interests, and though there is room for improvement in this area, this is also an attractive feature of the Fed's institutional structure. If we start all over with a separate agency, can we be assured that such independence and representation of interests will be present, and if it is, that it will persevere?
Second, the Fed's responsibility for conducting monetary policy causes it to collect lots of information about financial firms, and it has access to financial information in real time that other agencies do not. Thus, there are considerable complementarities between the Fed's role in setting monetary policy and its role as a regulator, and there are times—particularly in crises— when regulation is an important branch of monetary policy. If the Fed has to gain the cooperation of a separate agency in order to conduct the monetary policy it deems necessary in a crisis, this could hamper its ability to respond as needed.
(H/T Brad deLong)