Simon Johnson writes:  Kara Stein, a commissioner at the Securities and Exchange Commission (SEC). Stein delivered a far-reaching speech in June, in which she argued that systemic risk must become a more central responsibility for financial-market regulators.

More broadly, however, her point is that we need the FSOC to be able to do its job – to look for and assess all kinds of potential systemic risks. This needs to be done as a technical matter, not as part of the political process.

Not everyone at the SEC is as sensible as Stein. There is also some friction among the various regulators in the US, and we surely need more coordination across national borders – including with Europe. But the real danger is that powerful lobbies, working through members of Congress, are pushing back hard against the FSOC and its mandate.

No one likes scrutiny, of course. And everyone in the asset-management industry seems to fear being put under the Fed’s microscope, which is what happens if the FSOC determines that a business is systemically important.
The nature of externalities means that financial firms do not care about the costs that they may create for others. Big and small firms can create a wide variety of externalities, and these have to be examined carefully and dispassionately – exactly as Stein is recommending.

And yet, though assessing systemic risk is a technical matter, there is ultimately and inevitably a political question. The FSOC can figure out where the risks are lurking, but will it be allowed to do its job? If not, when the next crisis comes, those who opposed the FSOC’s proper functioning will bear the lion’s share of the responsibility.   Systemic Risk