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.

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Event Registration is Closed
Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Event Registration is Closed
Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.