On Tuesday, while commenting on his administration's decision to allow ten banks to repay their TARP bailout funds, President Obama did his best imitation of a stern schoolmarm:
"I also want to say: the return of these funds does not provide forgiveness for past excesses or permission for future misdeeds."
To which one has to respond: Where's the stick? As any parent knows, wagging your finger and talking tough isn't enough. There have to be consequences for bad actions. In my household, cutting off access to the family computer gets the point across. But what's it going to be for the banks?
Right now, there is no clear answer. Quite the opposite: The administration seems to leak a different regulatory proposal every day. One day the administration is proposing stern limits on executive salaries; and then the next, dumping that plan in favor of a vague recommendation that shareholders get to vote on compensation. One day the administration says it wants to consolidate the alphabet soup of regulatory agencies with responsibility for supervising the financial system; and the next day it says, no wait, never mind, that will result in a "messy turf battle" that we'd rather avoid.
Even worse, the decision to allow banks to repay their TARP money before coming up with any significant regulatory revision sacrifices a great deal of the leverage the administration ever had with those banks. For anyone who believes that now, with the memories of last fall's chaos still fresh, is the time to seriously revamp how financial markets are regulated, the mixed signals and dilatory pace of the Obama administration are worry-making.
Which is why it is time to mark June 17 on your calendar. On that day, the Obama administration is supposed to unveil its comprehensive outline of regulatory recommendations that it will call for Congress to codify into law. Depending on what the administration proposes and how hard it works to realize its vision, it could end up being one of the more important days in the history of financial market regulation.
If you're looking for clues as to what might be on the agenda, then I recommend a fascinating speech delivered on Monday by Daniel Tarullo, Obama's first nominee to the Federal Reserve Board of Governors. (If you don't feel up to digesting all 5,400 words, the Wall Street Journal's David Wessel has a handy summary of the main points.)
When Tarullo, a Georgetown law professor and specialist in international banking and international financial regulation, was first appointed, the economist Tyler Cowen, who is by no means a fan of the Obama administration, called him a "high-IQ, high experience, high quality economic nomination." It's easy to see why, after reading the speech, which integrates a compelling history of the course of financial regulation from the Great Depression onward with an analysis of recent events and some clear recommendations for how to move forward. Tarullo forthrightly calls for "a major reorientation of our regulatory and supervisory system," including new authority to regulate nonbank financial institutions capable of causing systemic risk, larger capital requirements for financial institutions, compensation reforms and regulatory agency reorganization. It's good stuff, and if it offers us a clue as to what the Obama administration plans to unveil a week from now, it might go a good ways toward reducing some of the growing anxiety that we might be letting a historic opportunity slip through our hands.
As Tarullo closes his speech:
I have noted the observation of a number of thoughtful commentators that, given the continuing difficulties in credit markets, we need not rush to reform our regulatory system. While I certainly agree with the propositions that we are unlikely to see widespread financial excesses in the near term and that we must get reform right, I believe it is essential to move forward now. History shows that opportunities for real reform are often short-lived. Momentum can too easily be lost, and the return of better times too easily leads to complacency. If we are to spare the next generation the pain and loss caused by a financial crisis, we must not only learn lessons. We must act on them.
So says the new man at the Fed. It's good to hear. Tune in next week to learn the details.