Regulation

Are Financial Regulators Too Political, or Not Political Enough?

Regulatory agencies were never designed to be political, but the tables have turned.

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Financial regulation is becoming a catch-22: The regulators are too politicized to be left unsupervised, but they aren't political enough for elected officials to control them adequately.

Generally speaking, financial regulators are expected to handle issues that are considered important but not terribly controversial, such as preventing bank failures. Their design reflects this, with features meant to insulate them from political pressure. But in the face of congressional gridlock, financial regulators are increasingly seen as an alternative to legislation. We hear calls for them to use their considerable power on such controversial issues as the environment, labor, and restricting access to legal-but-controversial products and services like firearms, pornography, and payday loans. And sometimes those calls produce actual policies.

Now, government agencies are bound to do controversial things. That's why our system includes checks and balances that subject agencies to some level of ongoing control by elected officials. For example, Congress's power of the purse allows it to rein in agencies via limiting spending or cutting budgets. Likewise, agency heads serve at the request of the president, which allows new administrations (or administrations feeling the political heat) to replace them. Limits on how long an "acting" head can run an agency prevent a president from completely circumventing the Senate's confirmation authority.

But financial regulators are not treated the same way. Many of these regulators—including those at the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB)—do not rely on Congress for budgets or spending authorization. Instead of an agency head that serves at the president's pleasure, it's common to see multi-member boards, often with members who can only be removed "for cause," and with terms that exceed the president's.

And while many of these boards are branded as bipartisan, the reality is that agencies don't need a full board to function. The FDIC's bylaws say the agency can operate with just one board member. If a comptroller isn't confirmed at the OCC, a deputy comptroller appointed by the treasury secretary can run the agency in perpetuity. The CFPB is the exception, with an at-will solo director—but that's because the Supreme Court stepped in to say the protection originally granted to the director was unconstitutional.

This is one reason Republican senators have raised so many objections to President Joe Biden's Federal Reserve nominees: It's one of the few tools they have for exerting power over the regulators. If they don't want the Fed trying to push banks away from activities that might contribute to climate change—something Sarah Bloom Raskin, the nominee for vice chair of supervision, has said regulators should do—then this is their last best opportunity to exercise control.

These insulations from political checks and balances are supposed to give financial regulators independence from the whims of politics. And that might be acceptable if the agencies really were purely technocratic bodies pursuing non-controversial goals. But if financial regulation becomes a tool of broader regulation, the insulation can circumvent structural democratic safeguards.

In an ideal world, Democrats and Republicans could reach a broad and durable deal to depoliticize financial regulation, keep the power of the agencies within intended limits, and leave contentious political issues to Congress. But this would likely require a level of trust that doesn't exist in American politics. In light of this sad state of affairs, it may be necessary to treat these agencies as political beasts and reform their structure to reflect that.

That means removing for-cause protections for agency leadership, requiring congressional approval for all budgets, and either replacing bipartisan panels with sole directors or requiring the presence of at least one member from each major party for there to be a quorum. And if officials fear that this would give politicians too much more sway over the central bank, the Fed's regulatory authority could be shifted to another agency.

Such drastic steps would present political challenges of their own. But if financial regulators are going to be political actors, they should be treated accordingly.

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  1. And that might be acceptable if the agencies really were purely technocratic bodies pursuing non-controversial goals.

    Because nothing screams libertarian like incorporating the worst parts of the EU.

    Go actually fuck yourself.

    1. Hey now. Sarc and Mike were very clear this morning that we aren't allowed to point out flaws in reasons articles from a libertarian standpoint. They are going to get upset.

      But agreed. They should fuck off and stop rationalizing overbearing regulations if done with good intentions. I dont know when this pattern infected libertarian thought but it is far too prevalent these days.

      1. It stems from elitism (see Jeffy over the last year).

        They genuinely believe that they are the only ones qualified to stand up for their purported beliefs. And, as most elitists so often do, they completely abandon those beliefs in favor of "managing the state".

      2. They should fuck off and stop rationalizing overbearing regulations if done with good intentions.

        What intentions? The data are the data. Sure, they may've been collected with a distinct slant but The Method is supposed to obliterate that. Really they're just following the data and regulating the market because, as everybody knows, unregulated markets don't function. No way, no how.

      3. Tony must not be giving them enough love.

  2. Let banks fail. Death is a natural part of evolution. This includes a business. Banks would be free to buy insurance like the FDIC of they wanted to.

    Government regulation is political because there is power in the regulations. See ESG for a blatant example of the left forcing politics through regulations.

    1. And, unlike the FDIC, a privatized substitute would have to guard against insolvency, or suffer consequences.

    2. What does Perry Mason have to do with government regulation?

      1. Perry Mason? Nothing. But Sheriff Bill, he's tied into all that.

  3. Reason Masthead: "We cede the Statist ground and quibble over the details."

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  4. Regulatory agencies were never designed to be political

    What kind of libertarian nonsense is going on there in DC? Maybe you should relocate headquarters out of the swamp.

    Government regulation has always been, will always be, and absolutely right now is political. It has always been either reactionary in response to ginned-up cronyism (Standard Oil, meat packing, AT&T) or pre-emptive by alert burrocrats looking to make a few extra bucks.

    ALWAYS. It has NEVER been altruistic or ideal or noble.

    This is libertarianism 101. You guys need a refresher course. I recommend Henry Hazlett's Economics in One Lesson or a daily dose of Cafe Hayek.

  5. Many of these regulators—including those at the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB)—do not rely on Congress for budgets or spending authorization are unconstitutional and a threat to liberty.

    FTFY

  6. Rankin is fucking corrupt, is what she is. Disgraceful ethics. And then lying to Congress. Her husband is a real prize POS as well.

  7. Let me know when the Fair Access to Financial Services Rule is reinstated. Until then, I'll be watching as the Democrats try more Operation Choke Point attacks to persecute unfavored groups.

    1. This is why the democrats should be Eli 8mated, and the republicans put on a very short leash.

  8. Financial regulation is becoming a catch-22: The regulators are too politicized to be left unsupervised, but they aren't political enough for elected officials to control them adequately. Generally speaking, financial regulators are expected to handle issues that are considered important but not terribly controversial, such as preventing bank failures. Their design reflects this, with features meant to insulate them from political pressure.

    You aren't even trying to keep up a facade of libertarianism anymore, are you?

    Good grief, Reason writers, stop being such assholes and stop giving the libertarian brand a bad name. Be honest for a change and call yourself "moderate progressives" or whatever you actually are.

  9. Seeing as federal employees are about 94 to 95% hard left I would say that all of the institutions are political, and none of them care about the law

  10. “Too political” - I wonder how political is too political.

    Which of these regulators are pro- Social Security Privatization? Which are anti- Inheritance Tax? Which are pro-Fracking? Which ones are pro-2A?

  11. I would say the issue is not that they are too political, but that they are too numerous.
    (and too powerful)

  12. >>Regulatory agencies were never designed to be political

    dude c'mon if they exist they're either policy or science. and they're not science.

  13. Another fine Irish or Italian nominee for a financial slot huh? Not much diversity is there with that sector for the marginalized groups is there?

    That said..easy solution..the FDIC isn't needed. Just mandate two types of accounts: demand (money is never lent out) and time (which the bank lends and tries to make a profit for you but your money isn't insured). Easy solution to "bank runs."

    Also end the Fed..isn't needed. the market can decide interest rates..

  14. Regulatory agencies have always claimed not to be political, and this was always a lie and a fraud. Technocratic progressivism is a political position, despite its claims and self-delusions of being apolitical and neutral.

  15. A friend of my girlfriend once asked Annette and me - can you trade crypto 24/7? We didn't understand her surprise at first, and then Jewel clarified. Her father lost half of the family capital on brokerage assets, and it is also possible to trade there only at certain hours. There is no such thing here. And you can't lose the entire asset, it's unrealistic, and you can trade at any convenient time.

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