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The Dilbert Strategy
By Paul Krugman
The New York Times
Monday 31 March 2008
Anyone who has worked in a large organization - or, for that matter, reads
the comic strip "Dilbert" - is familiar with the "org chart"
strategy. To hide their lack of any actual ideas about what to do, managers sometimes
make a big show of rearranging the boxes and lines that say who reports to whom.
You now understand the principle behind the Bush administration's new proposal
for financial reform, which will be formally announced today: it's all about creating
the appearance of responding to the current crisis, without actually doing anything
substantive.
The financial events of the last seven months, and especially the past few weeks,
have convinced all but a few diehards that the U.S. financial system needs major
reform. Otherwise, we'll lurch from crisis to crisis - and the crises will
get bigger and bigger.
The rescue of Bear Stearns, in particular, was a paradigm-changing event.
Traditional, deposit-taking banks have been regulated since the 1930s, because
the experience of the Great Depression showed how bank failures can threaten the
whole economy. Supposedly, however, "non-depository" institutions like
Bear didn't have to be regulated, because "market discipline" would
ensure that they were run responsibly.
When push came to shove, however, the Federal Reserve didn't dare let market discipline
run its course. Instead, it rushed to Bear's rescue, risking billions of taxpayer
dollars, because it feared that the collapse of a major financial institution
would endanger the financial system as a whole.
And if financial players like Bear are going to receive the kind of rescue previously
limited to deposit-taking banks, the implication seems obvious: they should be
regulated like banks, too.
The Bush administration, however, has spent the last seven years trying to do
away with government oversight of the financial industry. In fact, the new plan
was originally conceived of as "promoting a competitive financial services
sector leading the world and supporting continued economic innovation." That's
banker-speak for getting rid of regulations that annoy big financial operators.
To reverse course now, and seek expanded regulation, the administration would
have to back down on its free-market ideology - and it would also have to
face up to the fact that it was wrong. And this administration never, ever, admits
that it made a mistake.
Thus, in a draft of a speech to be delivered on Monday, Henry Paulson, the Treasury
secretary, declares, "I do not believe it is fair or accurate to blame our
regulatory structure for the current turmoil."
And sure enough, according to the executive summary of the new administration
plan, regulation will be limited to institutions that receive explicit federal
guarantees - that is, institutions that are already regulated, and have
not been the source of today's problems. As for the rest, it blithely declares
that "market discipline is the most effective tool to limit systemic risk."
The administration, then, has learned nothing from the current crisis. Yet it
needs, as a political matter, to pretend to be doing something.
So the Treasury has, with great fanfare, announced - you know what's coming
- its support for a rearrangement of the boxes on the org chart. OCC, OTS,
and CFTC are out; PFRA and CBRA are in. Whatever.
Will rearranging these boxes make any difference? I've been disappointed to see
some news outlets report as fact the administration's cover story - the
claim that lack of coordination among regulatory agencies was an important factor
in our current problems.
The truth is that that's not at all what happened. The various regulators actually
did quite well at acting in a coordinated fashion. Unfortunately, they coordinated
in the wrong direction.
For example, there was a 2003 photo-op in which officials from multiple agencies
used pruning shears and chainsaws to chop up stacks of banking regulations. The
occasion symbolized the shared determination of Bush appointees to suspend adult
supervision just as the financial industry was starting to run wild.
Oh, and the Bush administration actively blocked state governments when they tried
to protect families against predatory lending.
So, will the administration's plan succeed? I'm not asking whether it will succeed
in preventing future financial crises - that's not its purpose. The question,
instead, is whether it will succeed in confusing the issue sufficiently to stand
in the way of real reform.
Let's hope not. As I said, America's financial crises have been getting bigger.
A decade ago, the market disruption that followed the collapse of Long-Term Capital
Management was considered a major, scary event; but compared with the current
earthquake, the L.T.C.M. crisis was a minor tremor.
If we don't reform the system this time, the next crisis could well be even bigger.
And I, for one, really don't want to live through a replay of the 1930s.
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