It’s the regulations, not the regulator

Source: New York Times (Free Registration)

It has become a truism of the financial crisis that the system was prone to collapse because there was no single regulator who had the legal tools and authority to prevent a systemwide meltdown. That belief has led to calls from some lawmakers and major banks, among others, for a new “systemic risk regulator” — one regulator to monitor the entire financial landscape for problems that could lead to cascading failures. In recent days, the unfolding fiasco of the American International Group and its federal bailout seems to have reinforced the drive for a systemic-risk cop — and the notion that putting one in place is the key to solving all our problems. Speaking of the insurance company’s mess on Wednesday, President Obama said that he had consulted with his economic advisers and with Representative Barney Frank, the chairman of the House Financial Services Committee, about developing tools to “prevent ourselves from getting in a situation where an A.I.G.” can threaten the entire financial system. There’s just one problem with all that. The premise is false. The financial crisis, including what went wrong at A.I.G., is not just the result of a missing regulator, a gaping structural gap in the regulatory framework.

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