Suicide, Accident or Murder?
January 12, 2010
The Sentinel would play a single, complementary role: to regularly evaluate the health of the nation’s financial regulations from the perspective of the public. It should be independent politically and independent of the financial system, Levine says – it shouldn’t have any direct regulatory authority, which breeds coziness. “It has no power except to formulate a view,” he says.
To be effective, Levine’s “Sentinel” would need to be an established Washington institution – whose leaders are given long tenures like the Fed chairmen to give it political independence – with a clear mandate to give definitive public assessments on a regular timetable. “If you get 500 independent experts coming to Washington and testifying, you get a lot of noise. If you get an institution that’s politically independent and independent of the private sector with numerous experts examining what’s going on and coming out with messages about big problems, that’s very different,” he says. “That’s very difficult to ignore.”
The other key would be compensation. In order to draw the best minds from the financial sector and beyond while minimizing conflicts of interest, salaries would have to be high. “Getting good people to examine the financial sector means spending a lot of money,” he says. “Experts on finance are expensive.” But, he quips, “the alternative is every once in a while you get a few-trillion-dollar crisis.”
What difference could this new overseer have made in the run-up to the current crisis? Levine believes it would have called out Fannie Mae and Freddie Mac as “completely out of control,” although he admits that Congress might still not have done anything. He’s more optimistic that recurring warnings about the problems with the SEC’s rating agency model might have, over time, yielded steps in the right direction. And, he says, “I think a sentinel that would have screamed bloody murder about what was going on in terms of the banks and capital. It could have had an effect.”
More generally, he says, it could have broadened the debate over financial regulation, which he says was too often driven by narrow ideology – the belief that fewer regulations are always better – in the run-up to the crisis. “This type of ideology is very problematic,” he says, “because you can have regulations that work, and then you can get innovations like securitization, the use of credit default swaps, and all of the developments of the collateralized debt obligations.” Those innovations may have been beneficial to society, but they also intensified and created problematic incentives that called for new regulations, according to Levine.
“When you listen to Greenspan, for example, come before Congress and say there was a flaw in his system of thinking about regulation, I think this is it. He had a very simplistic view of the role of government,” Levine says. A sentinel-type institution “would have challenged Greenspan and provided a valuable counterweight to his view of the world – kind of an intellectual checks and balances.”
“As information and warning signs about the fragility of the financial system emerged, it was the people at the top who made bad decisions,” he says. With some innovative sentencing and a vigilant parole officer looking over their shoulders, Levine hopes, the odds will increase that regulators can make the right choices next time.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
