Professor Bainbridge...on law, politics, religion, culture & food

Should the SEC and CFTC be consolidated?

Tyler Cowen ponders the question and concludes:

So ideally the time to consolidate the SEC and CFTC is when the crisis is truly passed, not today.  In the meantime we should recognize that the case for separate agencies isn’t as strong as it used to be.  But given that the SEC already has its hands full (did they catch the Bear Stearns problems? No), do you want to divert its talent to managing the merger?  I’m not ready to press the “yes” button on this one, even though the final outcome is probably a better place to be.  A simpler alternative is to give the SEC authority over the derivatives and fold in the CFTC five years from now.

As I said the other day elsewhere, I still think the DHS is the right analogy (and it’s one that Tyler also mentions).

Remember 9/11? remember how we were going to create a Department of Homeland Security to solve the problem of having too many cooks supervising domestic security? How’s that worked out? The latest issue of the Economist opines:

Since September 11th America has made Herculean efforts to improve domestic security. It has undertaken the biggest departmental reorganisation since the second world war by creating the Department of Homeland Security (DHS), and has increased spending on homeland security by more than 300%, to over $40 billion a year. Most air travellers’ luggage is now screened. Cockpit doors on aircraft have been strengthened. Thousands of armed air marshals fly the friendly skies. Millions of doses of antibiotics and smallpox vaccine have been stockpiled to guard against biological weapons.

The absence of further terrorist attacks in America since September 11th suggests that all this may be having some effect. Mr Bush claims that America has prevented several planned al-Qaeda attacks. Unlike many European countries, America is also fortunate in not having a large alienated Muslim population. But none of this means that the country is safe. The jihadists regard America and Israel—the big Satan and the little Satan—as their prime targets. They are determined to follow September 11th with something spectacular, and they believe that America will not be able to tolerate large-scale casualties.

The DHS’s abysmal response to Hurricane Katrina revealed its lack of preparedness for a future attack. The department is a bureaucratic mess. In May 2007 a quarter of the department’s executive jobs and a third of the jobs in its intelligence department remained unfilled. In a survey of 36 government departments the DHS ranked last in job satisfaction, second to last in leadership and 33rd in talent management.

America’s defences have also been undermined by a tendency to treat homeland security as another form of political pork. Huge amounts of money have been spent on out-of-the-way places that face little risk of attack. Security is often tighter in small city airports than in the big hubs. America’s list of potential terrorist targets includes a petting zoo, a popcorn factory and an annual parade of mules.

The next president has to do better than this. America needs to concentrate on strategic targets such as power stations rather than spraying money around. It also needs to staff vital jobs on the basis of merit rather than political connections. ...

America has nevertheless erred badly in refusing to do what all other rich countries do: create a dedicated domestic intelligence agency rather than expect the FBI to do both police and intelligence work.

September 11th revealed the foolishness of this arrangement. The FBI’s intelligence division put up an appalling performance, failing to act on information about foreign terrorists operating on American soil and to share that information with the CIA. But instead of going back to the drawing board, the government responded by injecting more resources into the FBI’s intelligence arm. Since 2001 the bureau has increased the number of its joint terrorism task forces from 35 to over 100 and doubled the number of its intelligence analysts and its linguists.

Yet these increased resources are trapped within a police culture that is incompatible with the bureau’s task. Richard Posner, one of America’s great public intellectuals, points out that police and intelligence work require very different skills. “Criminal investigation is case-oriented, backward-looking, information-hugging and fastidious (for fear of wrecking a prosecution). Intelligence, in contrast, is forward-looking, threat- rather than case-oriented and free-wheeling.” The FBI and the CIA also have a long history of mutual rivalry and suspicion.

So the FBI’s mistakes have continued.

If we can’t get the domestic security alphabet soup right 6+ years after 9/11, how credible is a proposal like Paulson’s?