The Financial Stability Oversight Council’s fatal flaw

Consider the prospects for the Financial Stability Oversight Council (FSOC) set up by the Dodd-Frank Act. Can a big, cumbersome committee made up of representatives of numerous regulatory bureaucracies, each driven to defend its jurisdictional turf, actually produce new insights into the unknowable financial future? In particular, can such a committee have insights into the future “systemic risks” of complex, interacting systems, in which the members of the committee are themselves creators of such risks?

It seems unlikely.

As described by Vern McKinley in Financing Failure: A Century of Bailouts, the formation of such a committee is an expected political phase in the wake of a financial crisis. “The chosen solution from Washington after a financial panic is to create a panel of wise people in Washington that, so it is alleged, will smooth out the process of booms and busts in the financial cycle that periodically occur.” Forming such a group is something politicians can do when they feel they must Do Something. “Are we,” McKinley asks, “talking about the creation of the Federal Reserve in 1913, the Working Group on Financial Markets in 1988, or the Financial Stability Oversight Council in 2010?” All indeed reflect the same hope, always before disappointed. Is this time different? That also seems unlikely.

In his reflections on risk and uncertainty, Peter Bernstein wrote in 1998 that “The past seldom obliges by revealing to us when wildness will break out in the future,” and “Surprise is endemic above all in the world of finance.” The experience of a decade later showed how right he was.

Read the full text of this article on The American.

 

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