Photo Credit: Michael Daddino
I am mystified at why people might be outraged or surprised that the Federal Reserve does a poor job of overseeing banks. The Fed is an overstaffed bureaucracy. Overstaffed bureaucracies always tend toward consensus and non-confrontation.
I know this from my days of working as an actuary inside an overstaffed life insurance company, and applying for work in other such companies. Â I did not fit the paradigm, because I had strong views of right and wrong, and strong views on how to run a business well, which was more aggressive than the company that I worked for was generally willing to do. Â Note that only one such company was willing to hire me, and I nearly got fired a couple of times for proposing ideas that were non-consensus.
This shouldn’t be too surprising, given the past behavior of the Fed. In 2006, the Fed made a few theoretical noises about residential real estate loan quality, but took no action that would make the lesser regulators do anything.  It’s not as if they didn’t have the power to do it.  One of the great canards of financial reform is that regulators did not have enough power to stop the bad lending.  They most certainly did have enough power; they just didn’t use it because it is political suicide to oppose a boom.  (Slide deck here.)
As a result, I would not have enacted Dodd-Frank, because I like my laws simple.  Instead, I would have fired enough of the regulators to make a point that they did not do their jobs.  How many financial regulators were fired in 2008-2009?  Do you hear the crickets?  This is the #1 reason why you should assume that it is business as usual in banking regulation.
You won’t get assiduous regulation unless regulators are dismissed for undue leniency.  I have heard many say in this recent episode with Goldman Sachs, the New York Fed, and Carmen Segarra that those working for the Fed are bright and hard-working.  I’ll give them the benefit of the doubt; my own dealings with those that work for the Fed is that most of them, aside from bosses, are quiet, so you can’t tell.
