Today’s New York Times covers Ben Bernanke’s testimony yesterday to the Financial Crisis Inquiry Commission. He is quoted as admitting that “What I did not recognize was the extent to which the system had flaws and weaknesses that were going to amplify the initial shock from subprime and make it into a much bigger crisis.” As other reports noted, it is newsworthy when a leading regulator of the economy admits that existing systems of regulation failed to recognize “the flaws and weaknesses” of the system they are supposed to regulate. That is, the vast crisis engulfing US and indeed global capitalism, is such stark testimony to the failure of regulation that top regulators admit something.

Might we applaud this self-criticism among colleagues in Washington who all failed to prevent (or, so far, end) this crisis? Yes, if it led to even the slightest recognition of the need to change the system so as to eliminate the flaws and weaknesses that generated this crisis (as they likewise generated the last major crisis in the 1930s and contributed to the eleven recessions counted by the NBER between 1940 and 2006. But Bernanke got no further than calling for, in the Times’ words, “careful supervision and regulation to maintain financial stability.” Simply put, this means he has no thought about changing the system, but rather only ramping up the “supervision” and “regulation” that failed last time so it does not fail next time.

That was precisely what happened during the Great Depression of the 1930s. The system was left in place, but the regulation and supervision were enhanced. It failed to suffice then, but Bernanke cannot imagine it failing to suffice next time.
So banks will be left private and immense with every profit incentive to evade, weaken or repeal whatever regulations are passed (as they have always done). So the financial industry will undertake “innovations” (you know, like credit default swaps and collateralized debt obligations, and so on) that might just “take unfair advantage rather than to create a more efficient market” (Bernanke’s quoted words yesterday). Bernanke invites his audience to grasp the possibility that financial industry innovation “is not always a good thing.”

But Bernanke sees no need to change the system; it suffices to enhance regulation.

No wonder the financial industry need expend no capital attacking Bernanke’s proposals for system change. There are none. No wonder they can relax into mere irritation at the nuisances the new regulations will impose. No wonder the more irritated among them throw money at Republicans who promise to reduce or repeal even the nuisances.