The administration wants a committee to monitor too-big-to-fail institutions, which would then be regulated by the Fed. But how can we identify those institutions without creating moral hazard? Moreover, sometimes it is individual financial products, not institutions that pose the systemic risk.
Instead, the Federal Reserve should monitor the system and then work with the functional regulator to fix problems.
At the same time, we should fill the gaps in the functional regulation. We need to bring financial derivatives under a regulatory structure, with a clearinghouse for standard contracts.
Hedge fund managers should register under the Investment Advisors Act, so that the SEC access their books and prevent deceptive practices like overstating performance.
We should offer national charters to global life insurance companies. And we should have a consumer protection agency, focused on areas where there is no federal regulator, like mortgages and payday loans, but not duplicating other agencies' roles by regulating all retail services.