And when you look back over the history of global financial crises, from LTCM to emerging-market meltdown to Bear Stearns, there's one constant: the involvement of the New York Fed. So Geithner speaks with some authority when he says that at the moment it's difficult "to mobilise liquidity across borders quickly in a crisis" and calls for a unified regulatory framework rather than the current patchwork quilt both within the US and around the world which makes regulatory arbitrage and jurisdiction-shopping far too tempting and easy for global financial institutions. (One obvious case: ICE.)
Geithner has five specific proposals:
- Stricter capital, liquidity, and risk controls on banks.
- Revamping cash and derivatives clearing houses so that they can better withstand a major bank failure.
- Strengthening supervision of prime brokers' counterparty risks, as a means of staying on top of risks in the hedge-fund world.
- Revamp the regulatory framework in the US and around the world.
- Beef up the arsenal that central banks have at their disposal to use in the event of a crisis, rather than being forced to invent new weapons on the fly.
All of these are very good ideas, and it's hard to imagine Geithner's peers in the regulatory world objecting to any of them. For that reason, I'm optimistic that between the New York Fed's bully pulpit, on the one hand, and the fear instilled in regulators around the world by the events of the past year, on the other, these ideas will actually be acted upon in a reasonably timely fashion.
My only doubt is in number four: institutions, by their nature, will never willingly sign on any plan which makes them obsolete, which means in turn that many US regulators will fight these proposals. I'm not sure how to get around that problem, since I have no faith in the ability of the US legislature to force the matter in a constructive way. Maybe it will take one more spectacular failure - of Fannie Mae or Freddie Mac, perhaps - before the people running the USA wake up and realize that the current alphabet soup is not helping anybody except the regulatory arbitrageurs.