FDIC seeks power to make the rules

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Following the now-axiomatic advice to never let a good crisis go to waste, FDIC Vice-Chairman Martin Gruenberg is expected to ask the House Financial Services Committee today for more power to enact bank regulatory laws. The FDIC, which oversees 5,000 banks, currently doesn't have a say in the laws that it enforces.

There is no doubt that the regulatory structure needs to be reinforced. Speaking about the economy, President Obama said, "Here's a dirty little secret . . . most of the stuff that got us into trouble was perfectly legal. That's a sign of how much we have to change our laws." And the FDIC would seem to be in a perfect position to know what needs to be done. However, this could be a case of being careful what you ask for.
Changing laws is always easier said than done. Admittedly, Congress' passage of a new tax on bailout bonuses Thursday probably broke a few records for fast-tracked legislation, but the bill has yet to pass the Senate. Senator Charles Grassley's AIG suicide comments notwithstanding, it seems likely that the legislation will be toned down in an effort to grab a couple of Republican votes.

Furthermore, most Congressmen are not economists and, generally speaking, are not well-versed in the minutiae of banking regulation. Their solutions tend to be heavy-handed and have unforeseen long-range consequences. Given their vulnerability to the winds of political fortune, Congressmen often pass legislation that is immediately popular, but can be devastating at a distance of weeks, months, or years.

As Gruenberg will state later today, "The FDIC's perspective -- as deposit insurer and as supervisor for the largest number of banks -- would provide valuable input and expertise to the rulemaking process." As he also notes, while the FDIC has a few limited methods for prosecuting excessive compensation crimes, like those of AIG, its tools are currently insufficient to the task. Gruenberg has a good point: the FDIC is far closer than Congresss to the problems at hand, potentially making it much more effective as a rule-making body.

It turns out Congress seems somewhat happy to hand over the hard work of regulation crafting to the FDIC. Committee chairman Barney Frank (D-Mass) has already expressed a willingness to work with the agency to expand its capabilities.

The ultimate concern is whether giving what is essentially legislative power to a non-elected body is really in the best interests of fair governance. While the FDIC non-elected position could help it stay above the fray, previous scandals involving the FBI and CIA demonstrate the danger of subcontracting governance to groups outside the electoral structure. As Alan Moore once famously asked, "Who watches the Watchmen?"
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