We Need a Systemic Risk Advisor, Not a Regulator

Over the years, the NTSB has built great credibility. NTSB chairmen in both Democratic and Republican administrations have told me that the agency's personnel are first-rate, intellectually honest, and dedicated to perpetuating an institutional culture of integrity and rigor. The NTSB has no institutional interest in defending its previous regulations because it does not issue any -- it is free to call 'em the way it sees 'em.

Some critics argue that the NTSB's lack of authority is a defect. The agency called for retrofitting the aging subway cars involved in last month's fatal Washington Metro accident, but it could not order it done. But with the problem clearly identified, the Metro management that failed to follow that recommendation will now surely find the money to do so.

A systemic risk adviser, like the NTSB, could not order things done. But it seems far more likely to identify systemic risks than do operating agencies, which always have an interest in defending existing policies -- as Republican Sen. Jim Bunning, an acerbic critic of the Federal Reserve, understood when he asked last year how the Fed could regulate systemic risk when the Fed is a systemic risk. Or as Democratic Sen. Mark Warner, calling for a systemic risk advisory board, wrote recently in The Washington Post, the Fed has "conflicting or diverting responsibilities" and lacks "transparency and accountability." He called for a systemic risk advisory board similar to Pollock's.

After any financial crisis, there is always a cry that we should never let one happen again. But they always do, sooner or later, and in ways that almost no one anticipates. Proposals like the Obama administration's systemic risk regulator are intended to reduce risk to zero. But reducing risk to zero turns out to be very high-risk.

A more modest approach could produce better results. Would a systemic risk adviser, Pollock asks, have identified the dangers that, since last September, have become so apparent? His answer: "Perhaps. Could its voice and focus have served to reduce the systemic risk? Maybe. Given the huge potential benefit if it did, an independent systemic risk adviser is worth a try."