Financial Reform Deserves a Great Bureaucracy (and There Are Great Bureaucracies)

Recently we wrote that Sen. Chris Dodd's draft financial reform bill would create a "cumbersome bureaucracy." That wasn't an endorsement of a conservative talking point: The operative word was "cumbersome." The Right likes to use the word "bureaucracy" as an epithet, but the primary definition of bureaucracy is "a body of nonelective government officials." So what's the biggest bureaucracy in the world? The Pentagon.

Conservatives agree that we need a smart, efficient, well-run military "bureaucracy" to provide for the nation's defense, even though they wouldn't use that word. Shouldn't we demand the same kind of lean, mean efficiency from our "first line of defense" against financial disaster?

There are other well-designed bureaucracies in the US besides the Pentagon. The Environmental Protection Agency has a direct mandate to protect human health by promoting a safe environment. The Food and Drug Administration is clearly tasked to ensure that the substances sold and consumed in our country meet basic standards for health and safety. Everybody understands the mission and objectives of the Pentagon and the regulatory oversight responsibilities of the EPA and FDA.

Why, then, does the Dodd bill preserve so many of the complexities and confusions in the current financial regulatory system, and then add the vagaries of a committee or "oversight council" on top of that? One of the main features of the Dodd bill is that it divides oversight responsibilities depending on the size of the institution involved: large banks and thrift holding companies (over $50 billion) would go to the Federal Reserve. The FDIC would regulate smaller banks, as well as state banks and thrifts. And the OCC (Office of the Comptroller of the Currency) would "regulate national banks and thrifts of all sizes and the holding companies of national banks and federal thrifts with assets below $50 billion," according to Sen. Dodd's summary of the bill.

If you think this would invite confusion and infighting, you're right. Even Sen. Dodd realizes that, which is why his bill offers elaborate procedures for resolving inter-agency disputes through council deliberations.

Can you imagine running the Pentagon this way? It wouldn't make sense to have one military to defend us against large nations and another for smaller ones, with a deliberative body to step in to resolve disputes between them. Sure, we have the Joint Chiefs of Staff, but their role is strictly advisory. The military reports to a single leader, the Secretary of Defense, who reports in turn to the President. That's good bureaucratic design.

Then there's the issue of the proposed Consumer Financial Protection Agency. By downgrading the President's proposed "agency" to a "bureau" within the Federal Reserve, Sen. Dodd is sending the clear message that protecting consumers is less important than insuring Wall Street's financial health. What's more, he's giving the consumer protection function to an agency with a clear record of failure in this area.

Financial reformers need to look at effective bureaucratic design in order to figure out what works. The EPA and FDA both function well because their roles are clear and distinct. The EPA protects our health by keeping our outside environment safe. The FDA protects our health by ensuring the safety of the food and drugs we put inside ourselves. The two functions require different expertise, different organizations, and different priorities. It wouldn't work well if one agency was merely a "bureau" inside the other, with its budget dependent on the other and its decisions subject to veto by a ruling committee.

Sure, you hear talk about "downsizing government." But look at the people who say that: They've been protected from military threats by the Pentagon, protected from environmental disease by the EPA, and maybe even had their lives saved with drugs tested by the FDA. And yet all they want to talk about is "getting rid of bureaucracy."

The problem with the Dodd bill isn't that it's bureaucratic. The problem is that its proposals don't go far enough and aren't well designed. We need a financial oversight process with clear lines of authority and the ability to intervene swiftly and cleanly when bank behavior puts the country in danger.

In fact, what this country needs is another great bureaucracy.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future