Is There An Elizabeth Warren of Systemic Risk?

And would that be a good thing? 

This is a bit of a tongue-in-cheek way, I suppose, of trying to tie together some of the preceding posts and pose some follow-up questions for our guest bloggers.  Let me start with the first question, does systemic risk regulation need its own version of Elizabeth Warren? 

Now obviously Elizabeth Warren is a controversial figure, with many who worship her and others who seem to think she’s one step away from the devil.  So, I don’t intend this to be a debate about her personal merits.  Instead, what I’m trying to get at (granted, through a title designed to entice and/or inflame readers) are some of the points made by our guests here today. 

For example, in Saule’s very interesting new paper, which she discussed earlier today, she urges the creation of an independent government instrumentality staffed primarily by academics, public figures, and representatives of consumer and other public interest groups.  Similarly, Brett (building on an article with Dan) argues that the Office of Financial Research could become a regulatory contrarian – “an independent office that draws upon academics and does not itself make rules, it may be less subject to capture and more independent in its thinking.”

Although both concede that these proposals still leave many open questions, both, it seems to me, rely on the notion that a structural change of this sort can impact the political balance of financial reform.  That could be right, and one of the points I hope I’ve highlighted through my posts on the Volcker rule is the disproportionate investment by the affected industry in influencing regulatory outcomes. Still, though, some potential hurdles and concerns come to mind, some of which have already been thoughtfully raised by Cristie. 

For example, Cristie worries, to oversimplify her nuanced critique a bit, that regulators were not inclined to listen to real contrarians during the lead-up to the financial crisis.  I also notice that in his post Dan says:

empowered public interest groups do not simply provide regulators with additional information and perspective; they marry that information and perspective with the threat of political pressure through the use of media and public outreach.

So, I take it that Dan’s response to Cristie, at least in part, would be that successful contrarians would need to have, not only structural access, but also a type of grass-rootsy political power. Which, I have to say, brings me back to thinking about Elizabeth Warren.

Now, Paul Volcker was clearly an important public figure behind the Volcker rule. And folks like Simon Johnson and Nouriel Roubini were highly engaged in public advocacy and media play on systemic risk issues as well.  But I just haven’t noticed your average Joe or Jane in line at the grocery store talking about Paul Volcker or Simon Johnson in the same way they seem to talk about Elizabeth Warren.  Even the constant attention to Roubini’s sexual exploits hasn’t seemed to make him quite the household name that Warren has become. Does the public just find her more interesting?

Or is it because, once we move away from issues more directly related to consumers – or that seem to especially prompt their ire, such as compensation issues – it’s just not as easy to get the public engaged?  And if that’s so, what does that mean, if anything, for these types of contrarian and tripartism proposals?  Because, in addition to the incentive issues that Erik suggests make financial institution regulation different from other types of regulation, there just seems to me to be a problem with public salience and information levels, that I have to admit, is troublesome on many fronts. 

One of the things that surprised me about the Volcker rule letters was the amount of public anger they evidenced – people are really pissed off out there.  But it’s a rather ill-defined and amorphous sense of anger.  Rarely was there any indication that the writer understood, or cared, what proprietary or fund investment is, much less the ways in which FSOC interpretation of the Volcker rule’s complex and ambiguous provisions might govern such activities.  This suggests, not only the opportunity for principal-agent problems vis-à-vis elected officials, but potentially with any empowered public interest groups as well. 

That’s why, as I mentioned in my first post today, the normative implications to be drawn from this conversation will, I think, be in the eye of the beholder. Those who perceive elected officials as overly responsive to public sentiment will, I suspect, view federal courts or, in this case, agencies, as the gatekeepers against panic-driven regulation.  And the last thing they probably want is an Elizabeth Warren of systemic risk riling up the public about issues it doesn’t understand.  System critics concerned with transparency and accountability, however, will likely be troubled by the disproportionate (and relatively unified when it comes to externalizing costs, to come back to Erik again) influence of regulated financial institutions that we’ve been discussing here today, even when the regulation at issue is of questionable utility. 

Comments

[Erik Gerding]

One common reaction to the financial crisis, is that it was a failure of "leadership" and that we need better leaders in place to stave off future crises. This "Great Woman/Great Man" theory of financial reform is great for selling magazines. But we can't rely on the right person (whatever that means) being there at the right time.

What I like about the scholarship of the panelists is that it focuses instead on institutional design. Dan & Brett's great Regulatory Contrarions piece, for example, proposes some creative ways to harness and institutionalize policy entrepreneurs. One of the biggest challenge to any institution that seeks to use policy entrepreneurs is figuring out how performing well will advance their long term career prospects.

Onnig Dombalagian responded to one talk that I gave over a year ago that included a policy entrepreneur feature with a witty, but apt reference to the cursus honorum in Rome.

There is more to be said for the Great Woman/Great Man approach at critical junctures -- as when a new agency is formed.