Regulation Can't Guarantee Zero Financial Crises President Obama this week introduced a plan designed to overhaul the nation's financial regulatory system. It changes who oversees banks, gives new regulatory powers to the Federal Reserve and creates a new regulator to protect consumers from financial products. David Leonardt, of The New York Times, tells Steve Inskeep that he has a problem with all the talk about "robust regulation."

Regulation Can't Guarantee Zero Financial Crises

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Let's follow up now and Treasury Secretary Tim Geithner's effort to sell lawmakers on the Obama's administration plan to overhaul financial regulation.

Secretary TIMOTHY GEITHNER (Department of Treasury): We made the judgment that now was the time to pursue the essential reforms, those that addressed the core causes of the crisis and those that'll help prevent or contain future crises.

INSKEEP: That's Geithner before Congress. As we've heard this week, the plan involves streamlining of overseas banks, giving new regulatory powers to the Federal Reserve and creating a new regulator to protect consumers of financial products. David Leonhardt is an economics writer in The New York Times. He's been looking at this proposal, and he's got a problem with all the talk about robust regulation.

Mr. DAVID LEONHARDT (Economics Writer, The New York Times): Yeah, that's the part of the plan that worries me most - not just the word robust, but the notion that the way to prevent future crises is just to make sure that we have regulators who are good enough and paying close enough attention in the future.

INSKEEP: We try harder, is basically what that's saying.

Mr. LEONHARDT: That's right. And now the plan doesn't only have the we-try-harder idea, and we can get to that. But the notion that we can prevent banking crises and that if only we tell bankers not to do what they did before or if only we have regulators who are watching things robustly enough is really contradicted by almost all of history. We're going to have banking crises, and regulators are going to miss them in the future.

INSKEEP: That said, isn't there some argument there that if you are the kind of administration who puts people in regulatory agencies, who don't really believe in regulation, don't really believe the government has much of a role to play, they're not going to do very much. And if you have somebody who believes in an activist, regulatory system, they can make a big difference without a huge change in the structure of things.

Mr. LEONHARDT: Absolutely. Clearly, one of the causes of this crisis that we had is that we had people running government - Alan Greenspan above all - who kept saying we don't need regulation. We need deregulation and we need less regulation. And when you have the boss saying that, it really filters down through the ranks. Now, that's not what the Obama's administration is saying. It's not what Ben Bernanke is now saying at the Fed. And to some extent, that problem is already solved. The goal of this plan is to put in place structural reforms that are going to make future crisis less likely. And it does some of that, but I think if it airs on one side, it airs on the side of being too timid.

INSKEEP: What's missing?

Mr. LEONHARDT: Well, what's missing is more some of the stuff it already has. So it talks about the idea of putting in place more reserve requirements and cutting down on leverage for Wall Street…

INSKEEP: And it's telling a bank, they need to have more money in the bank, so to speak, if they're going to be lending a lot of money.

Mr. LEONHARDT: That's exactly right. And in some ways, what it's doing is acknowledging that the bank or some bank is going to make a lot of bad bets. And you're saying, look, some of you're even going to go belly up. And what we want you to have is enough cash on hand so that when you do go belly up, it doesn't send the whole system belly up. This plan has some of that, and at this point, it's vague enough that it's too soon to say whether it doesn't have enough of it. But I think that's the concern to have.

INSKEEP: So why would some of these provisions that seem obvious to you not be included here?

Mr. LEONHARDT: Well, you do have to worry that if you force banks to hold too much money that you're going to have a banking system that's inefficient and you're going to have a banking system that essentially imposes a larger cost on all of society. That's a really legitimate worry, and the administration is focused on that - rightly so. The reason why they might end up going too far and the reason why even if they don't end up going too far in this plan - which is still somewhat vague - that Congress might end up going too far is Wall Street hates a lot of this. When you have less leverage, you have less profit, right?

You are essentially, in Wall Street's eyes, wasting some of your money in this safe place rather than using it in a way to make a profit. Cutting down on profits is something that none of us like when it's our own profits. Wall Street has fought against it, and that's why they don't like these higher requirements.

INSKEEP: Are there political reasons that the administration did not leap for a giant remake of the entire regulatory system, as has happened in the past?

Mr. LEONHARDT: Absolutely. I think there are two. One, we should have some humility about the notion that any of us can know what exactly works. Maybe this somewhat more timid plan really is the right balance. And so if you are worried about how much you can get done, then maybe it makes sense to take one step and take a second step later rather than going too far. The second reason is I don't think financial regulation is Barack Obama's highest priority or highest interest. I think he cares more about health care. I think he cares more about education. And so I think if he is going to go really far on one thing and really push something and really make a stand in a fight, he's more likely to do it for health care than he is for re-regulating Wall Street.

INSKEEP: David Leonhardt of The New York Times. Thanks very much.

Mr. LEONHARDT: Thanks, Steve.

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