Last Updated Sep 18, 2009 12:11 PM EDT
You'll recall Geithner threw a tantrum last month over other government regulators, including Bair, refusing to line up behind the Obama administration's plan to hand systemic oversight authority to the Federal Reserve. The Treasury Secretary reportedly swore up a storm in reminding his peers just who's boss; he did not, I'd like to emphasize, threaten to hold his breath until his pinstripes turned blue.
Looks like the famously spunky Bair didn't get the message. Giving the keynote address at a conference on the future of global finance, she continued to openly endorse the idea of a regulatory council to protect the financial system (video of her speech is available here beginning at 8:21).
We're also in need of a regulatory framework that's proactive, and identifies issues and trends that pose risks to the broader financial system. The new structure, featuring a strong oversight council, would monitor the financial system, from insurance companies to banks. By looking broadly across all of the financial sectors, the council will be able to adopt a "macro-prudential" approach.In other words, bounces off me, sticks on you. Like glue. Bair also delivered a rabbit punch to the government's financial reform efforts. While praising the Fed's and Treasury's actions to stop the meltdown, she also said the measures are perpetuating the "too big to fail" problem by propping up certain large financial players.
The point of looking more broadly at the financial system is that reasonable business decisions by individual financial firms may, in the aggregate, pose a systemic risk. This is a classic "fallacy of composition" problem that cannot be solved by simply making every financial product or practice safe. Instead, rules issued by the council would be uniform for all parts of the regulatory system. The council would monitor how the rules are working and would have the power to take corrective action, if necessary.
In short, an oversight council would see the big picture, with a wide-range of views making it more likely we'd flag the next problem before it causes significant damage.
Unfortunately, measures taken during the past year -- while necessary -- have only reinforced the idea that some financial firms are simply too big to fail. Today, we now have fewer players in critical areas of our markets. The market is even more concentrated and interconnected than before. And unless we adopt needed reforms, our system will be more, not less, fragile after this crisis. . . . This has got to stop. We need a credible method for closing large financial companies without inflicting collateral damage on the economy.You go, girl. And remember, no running in the hallways.