It is not only unnecessary to establish a Resolution Authority for systemically significant financial companies but also probably worse than unnecessary. It is probably wasteful and even in some respects dangerous. It would create an entity that must do something when for years there really would not be anything for it to do.
We are in the midst of trying to recover from a major shock to the world's economies, and we have discovered that many large firms, a number of which were deemed to be the "best run" among all firms, could not weather the storm and either failed or have been very badly damaged.
As a result, we are discussing some form of broader monitoring of the system to discover serious problems that have possible systemic impacts and to do something about those problems so that we can change future history. That makes a lot of sense, even though the chances of that monitor casting its eye in the right direction will be low — remember, Frodo got through.
At the same time, we are talking about establishing an entity to resolve systemic problems, not just spot them. That does not make sense.
The combination of the bankruptcy courts and other statutory authorities already in place have produced solutions that, all things considered, are not bad. Very large institutions failed, but I suspect history will show that the resolution of these failures did not "cause" the problems or even exacerbate them to any meaningful extent. There will be arguments over that, but it seems unlikely that they did.
The resolutions stabilized major sectors of the finance system, which was the intent, and even though large sums were appropriated, time will show that the cost to the government from the resolutions will be relatively modest. The Troubled Asset Relief Program money will be repaid.
Would an alternative solution for Lehman Brothers have caused the markets to continue to operate smoothly? We'll never know, of course, but my guess is that researchers will say in a few years that it would not have made any long-term difference. The emperor was seen clearly not to have any clothes as the New Century, Bear Stearns, Lehman and American International Group dominoes toppled.
Could it have been smoother? Maybe, and therefore, we should fix known problems.
Determine what else would have been done if an agency or two had had additional authority, and give it to them. Give the Federal Reserve Board the authority to deal with nonbanking firms, or distribute that authority in some other way among existing agencies.
But don't create a Resolution Authority. Such an authority would need to "do something" to show that it should continue to get appropriations from Congress. Yet it would only be expected to "do something" every 20 years of so. So what would all the employees in that organization do to earn their GS 15s during those dull dog years when nothing is going on? The answer: They would do something, and it would not be resolving systemic risks.
That is a danger if you believe government agencies are not in business just to be in business.
There are, of course, other dangers. Not the least of those is that the establishment of such an agency would create a false sense of security, and everyone would become slightly less vigilant. That would be a mistake.
If a systemic problem fell on this new agency before it "hired up" and had its fifth or sixth training exercise, we would flounder in the battle. But even if it were "hired up," the problems for which they would train would probably not be the basis of the next crisis.
My old agency, the Federal Deposit Insurance Corp., is most often named as the one we should look to, but none of the current agencies knows enough about all the various businesses in which a variety of systemic risk entities can engage, though the Fed has an idea at least.
They are really good people in the FDIC, but they know banks best and the things that nonsystemically significant banks engage in. Much has changed since I was there, but the basic mission — retaining confidence in the deposit insurance system — remains, and it should remain as the reason for the FDIC's existence.
It is a truism, but sometimes a forgotten one, that the individuals leading the agencies now and the people who will be hired to perform systemic resolution will be long gone before the next systemic crisis leaps out at us, so decisions on structure should not be made on the basis of present personnel, no matter how appealing or unappealing they might be.
What should happen when the next new crisis develops?
There's no problem if it is the same one redone — we have been through that, and we'd simply pull out the old maps, changed with the "fixes" we make in the next couple of years.
If, as is more likely, it is some unknown problem, gather the best brains in the agencies in one room, and work it out against the backdrop of the modified authorities in place.
There will be a lot of information from the systemic risk regulator — much more than we had this time around. The agencies will work together, at least until the crisis passes, and my bet is that history will ultimately show they did a good job.
There is no perfect solution to a failure of a business or a significant sector of the economy; there are only better or worse solutions. It is not clear that establishing a Resolver in Waiting would lead to better solutions.
It is clear, however, that it would create problems.
