Bernanke, Federal Reserve Wrong for the Job

(MoneyWatch)  Desperation in job seekers isn't a pretty sight. The nervous laughter, the excessive eagerness to please. Why, you can almost see Ben Bernanke's eyes darting around as he spoke this morning at a Federal Reserve Bank of Boston event.

You see, the Fed chairman is rather eager for his agency to become the nation's chief financial supervisor -- one regulator to rule them all. The speech is effectively an ad for why it should get the job (not that there's anything wrong with that).

Exhorting Congress to get on the stick in doing what's necessary to stabilize the financial system, Bernanke highlights the Fed's recent accomplishments. Those include playing "a key part in the international effort" to coordinate financial rules; leading the stress tests on big U.S. banks; driving the effort to improve risk management; cracking down on banker pay; and safeguarding mortgage borrowers and credit card users. And he's a team player, too.

Bernanke also ticks off the failures of other pretenders to the supervisory throne. He pointedly notes that "traditional bank regulatory reports have not been sufficiently complete or timely to support continuous monitoring and analysis of the dynamic and diverse business activities of the largest, most complex organizations." FDIC, OCC, OTS? Not in the Fed's league, baby!

Just to make sure we catch his drift, Bernanke repeatedly points out the need for "consolidated" financial supervision (14 times, to be exact). The chairman also makes the obligatory bow toward inviting all regulatory agencies to the dance. But he leaves little doubt about who should lead.

What Bernanke doesn't say explicitly (and he doesn't have to since everyone already knows it) is the biggest reason why his agency is the top candidate for the job of systemic regulator: It pays the bills. As we've seen, the Fed is the lender of last resort, doling liquidity to favored financial companies like a parent handing out the kids' weekly allowance.

And there is something wrong with that. Because despite the Fed's fancy credentials, Bernanke appears to lack one vital quality for the role he's proposing to take on -- guts.

The Fed's biggest challenge in years to come will be what to do about its star, but mischievous, "too big to fail" companies. Some financial regulators have the gumption to state the obvious, which is that it's time to whittle these giants down to size. By contrast, Bernanke pushes the dubious notion that they can be properly disciplined:

Consolidated supervision of systemically important institutions, together with tougher capital, liquidity, and risk-management requirements for those firms, is needed not only to protect the firms' stability and the stability of the financial system as a whole, but also to reduce firms' incentive to grow very large in order to be perceived as too big to fail.

There's a problem here. Once a company has grown large enough to be systemically important (a squishy notion if ever there was one), it's effectively beyond supervision. In addition, we live in a corporatist age, when companies live by the gospel of growth. Reducing financial firms' "incentive to grow very large" would require a molecular biologist, not a regulator.

Besides, the Fed has no history of playing the heavy. It was created as, and remains, a creature of the industry it serves. Would Bernanke (or his successors) ever dream of hauling the CEO of Goldman Sachs (or its successors) into his office for a sermon on the perils of excessive compensation?

Think carefully before answering, Ben. Your job may depend on it.