Tyler Cowen ponders the theoretical merits of a proposed re-organization of financial regulation.
The Fed is smarter than other regulators, the Fed can pay higher salaries, and the Fed has more independence.
...One important question is what kind of relationship would develop between the Fed and a new, unified office of prudential regulation. ...Even if there is consolidation of all the loose regulatory spokes (should credit unions really get a separate regulator?) into an oversight agency, we should somehow keep the Fed's special access to bank balance sheets. I'm not sure how the Paulson plan fares on that score.
I have a very cynical view of re-orgs. I thought that the Department of Homeland Security was a re-org that would set back homeland security for years.
When you get below the level of theory and look at actual implementation, re-orgs are all about petty turf wars.
When I was at Freddie Mac, re-orgs were constantly taking place, to the point where it was dangerous to take any time off. Twice I had to take a couple days off for personal business--once for a funeral and another time because I broke my wrist. Both times, I came back to having less responsibility and fewer people reporting to me. It was that ugly.
When you write the new org chart down on paper, you assume that the affected managers are going to act constructively and focus on the greater good. In practice, they will be more like a pack of dogs who hasn't been fed for two days that gets tossed a small steak.
All re-orgs create near-term dysfunction. Maybe some of them create some long-term benefits. But I think there is almost always an alternative way of obtaining those benefits more effectively at less cost. In a corporate setting, my guess is that 9 times out of 10 the problem that you blame on a bad org chart is really a problem of one or two managers who are messing up.
In the case of mortgage markets, the internal contradictions of regulatory policy are more of a problem than the execution of the policy. For example, you can't place a high priority on home ownership for the "under-served" and then act all put out when so many of these folks who can't afford homes wind up in foreclosure. I remember a few years ago a friend who was about to leave Freddie Mac muttering to me that the market was "over-served," which we now know was even more correct than he might have realized at the time.
I agree with Tyler that an independent financial regulator with a competent staff will do a better job than an agency that is constantly hectored and pressured by Congress. In fact, you can anticipate that whatever changes to financial regulation that do take place will be undertaken above all to satisfy the turf requirements of various Congressional Committee Chairmen.