Next week, Congress will go back into the morass of systemic-risk regulation. That a new regulator of some shape will emerge seems a given. However, in the year – that’s right, year – since Treasury first proposed a new systemic-risk council, we’ve grown less and less comfortable with the idea. In fact, we fear that a new systemic-risk regulator will pose a systemic risk all its own: It gets current agencies off the hook and could permit a resumption of complacent ways once the coast is clear.

As each former regulator writes his book and each current one tells his or her side, there’s one common theme: none thinks he or she could have done anything much under current law to undo the debacle. In our view, that’s just plain wrong – all of them had lots of authority and plenty of warning, but none did much of what could be done, let alone call for anything that was missing. To be sure, all now are seriously chastened, rushing to issue a raft of new rules – of course doing so under current law that would have allowed them years ago. New consumer-protection, mortgage, capital, resolution and inter-affiliate transaction restrictions show clearly what regulators can do to govern systemic risk all by themselves if they’ve a mind to.

Because regulators could have and still can fix much of what went wrong, the new systemic-risk regulator reminds us of all too many past actions to cover up avoidable missteps. The cliché – apt, to be sure – for this focuses on those who fight past battles instead of preparing for new wars. The French, thus, erected the disastrous Maginot Line in hopes of forestalling another German attack instead of understanding why its 19th century-trained military failed to anticipate how the Germans came so close in the first one. Even worse, what was to become the Allied military stood down because the Maginot Line was presumed an insuperable fortress that would not only protect France, but also the rest of Europe from another German assault. Oops.

This is a hard example, we know, but the systemic regulator reminds us of Maginot-style defenses. It would be a seeming bulwark against barbarians, but only if it’s really robust and well-manned. If the forces that design the Line and then man the barricades are the same old ones – pretty much what’s proposed for systemic regulation – then all that’s been done is to erect another battle line, not change the terms of combat.

 

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