Rules of the game

A new protection agency could solve our regulatory ills if it replaces, not supplements, the existing framework.

Yesterday, the Obama administration called for a sweeping regulatory overhaul to protect the nationâÄôs financial consumers. The Treasury Department claims the current regulatory system is confusing, fragmented and basically âÄúdesigned to fail,âÄù and should be replaced with one powerful new agency. The Consumer Financial Protection Agency, if approved as described by the Obama administration, would mark the largest revamp of financial regulations since the New Deal. The new watchdog could monitor and prevent predatory mortgage practices and write consumer credit card protection rules. If the Consumer Financial Protection Agency sets up shop in Washington, D.C., it had best do so under arrogant pretense. It must replace the failed regulators. Remember that the private Federal Reserve Bank has had the responsibility to supervise and regulate our banking institutions for years, but it became apparent by last March, with the failing of Bear Stearns, that the Federal Reserve Bank is better at bailing out than regulating. Interestingly, one regulator took full responsibility for the AIG disaster. The little-known Office of Thrift Supervision, a small and meagerly funded regulatory remnant from the savings and loans crisis, admits it failed to hold AIG to Federal standards while on its watch. All of this goes to show that regulation is less successful in practice than in theory. On paper, a wide cast regulatory net captures every problem. In reality, the sweeping nature of our regulatory framework allows big problems to slip through the cracks. Lots of regulators equates to lots of institutions at which to point fingers. At least under a unified system, regulators would have to point the finger at themselves. If the overhaul places regulatory responsibility clearly under one office and sees the existing fragmented regulatory framework dismantled, it could mark progress. But if the Consumer Financial Protection Agency simply shoves its way into the regulatory mix, expect to see more AIGs down the road.