Populism and Regulatory Reform, Cont'd

How mired in political muck are we? In the New York Times Tuesday, Andrew Ross Sorkin argues that regulators and policymakers have to high-tail it to Davos (Barney Frank gets a field trip) to talk about creating a global regulator, a sort of financial WTO, even though of course Congress can't seem to agree on something as relatively mundane as a consumer products agency. Sorkin isn't wrong, just incredibly unrealistic, both about the global regulator and the healing powers of Davos. But he's not alone. Over at the Financial Times, former Securities and Exchange Commission chief Arthur Levitt has a column that offers a series of quite rational regulatory proposals that feel like they were written a year ago, then inadvertently stuffed in the back of his desk drawer. Yes, resolution authority would be helpful. And a rationalized regulatory structure is a swell idea too. And Levitt and Sorkin must be channeling each other, because the former thinks "it's essential that the president and Congress coordinate their proposals with those of other major financial markets to minimize regulatory arbitrage."

It is essential. So is just about everything else Levitt suggests. But Levitt's initial premise, that Massachusetts not only kicked off "fresh thinking about healthcare reform" and "given new urgency to financial market regulatory reform," indulges in a kind of desperately wishful thinking. Somewhere among the finger-pointing, the triumphalism, the backbiting, the loss of faith, the insults, the paralysis and the stark-raving fear of electoral defeat there may be some rethinking going on, but it has little to do with substance, on either health care or financial regulation, and everything to do with tactics, rhetoric and the next election. Please. The game for Democrats on health care is to try to salvage as much of the Senate bill as they can: to hold their base. And the president's recent proposal to restrain the banks is both incoherent and so far remarkably incomplete, particularly given the rhetorical buildup. Congress, which seems to be in a meltdown weirdly like Wall Street's last year, gets to wrestle with both of them at once.

My favorite part of Levitt's op-ed-in-amber is his straight-faced argument for merging the Commodities Futures Trading Commission and the SEC, which he describes as "the most obvious opportunity for restructuring." He's absolutely right. Well before the administration ever made its initial regulatory proposals early last year, nearly everyone assumed that that "rationalization" would be the easy part, a starting point for a general bureaucratic simplification and a step toward eliminating regulatory arbitrage. Yeah, right. Both bureaucracies fought hard to either preside over the merger, or retain autonomy. Both had their big constituents lobbying for them. And we ended up with a tie; the merger never even made it into the initial proposals from the White House, which has been, in any case, shredded by Congress. No one even brings it up anymore because it's essentially off the table, despite the continuing sense it makes, particularly for overseeing derivatives.

We can't merge two regulatory bureaucracies, and we're going to hand power to smooth out differences to some global regulatory czar? Sure. The deeper question raised by Levitt goes back to Massachusetts: What does that Democratic defeat really tell us? As everyone from David Brooks in Tuesday's New York Times to John Judis in a recent New Republic recognizes, Massachusetts reflects a populist upwelling. But what are the components of that outrage? Health care reform played a role, and so did anger at Wall Street and the banks. But Martha Coakley ran a terrible campaign, and there's obviously latent anti-Kennedy sentiments lurking beneath the surface in the Bay State and perhaps everything from racism to deep distrust of arugula. But even if you unpeel the animus against bankers, can you find a set of policies fueling it -- or is it more unfocused than that: a lashing out against elites on Wall Street and Washington that has little to do with specific administration policies involving Wall Street, such as dealing (or failing to deal) with too-big-to-fail or moral hazard? And if that's the case, that boiling anger may not be sated by anything the administration does in the short run, short of eliminating bonuses and arresting bankers. In fact, the only effective measure to combat this kind of populism is to reduce unemployment, get the stock market rolling and achieve some stability. But achieving that stability will require time and rational policies, both of which are currently in short supply.

The nature of this populism is important. Judis in the New Republic clearly lays out the often-tangled themes that run through what he calls left-wing and right-wing populism. What we know from past experience is that there is often a strain of paranoia and xenophobia running through populist movements, however unfocused. It's an open question whether "rational" policies will settle an irrational crowd over the short run. Probably the last policy that would satisfy the restless crowd is to announce that we are shifting some regulatory sovereignty to a global regulatory czar in order to avoid regulatory arbitrage. If there's anything the stereotypical populist hates more than a fat-cat banker, it's a foreign fat-cat central banker.

Robert Teitelman is the editor in chief of The Deal.