Laws that give regulatory authority or oversight responsibilities to government agencies are an important part of the nexus between law and liberty. That is because insufficient attention or oversight can reduce what the Constitution described as our “General Welfare.” For example, are our unalienable rights being sufficiently defended by the government intended for that purpose? However, we must ask, “Does more government oversight responsibility actually lead to more oversight—or less?”

Our latest banking crisis, beginning with Silicon Valley Bank’s plummet into insolvency, offers a good reason to think about such issues.

People with governmental oversight responsibilities are fond of intoning that “all is well,” like a mantra to reassure the rest of us that we are safe because they are doing their jobs. But all too often, that safety suddenly morphs into a crisis, revealing that in the realm of politics, “oversight” is perhaps the most ominous of Janus words.

Named for the Roman god depicted with two faces pointing in opposite directions, Janus words are words that have two opposite meanings, such as cleave, hew, sanction, scan, and peruse. “Oversight” is an excellent example which can mean both “the act of watching carefully” and “a failure to watch carefully.”

This ambiguity is amply illustrated in the failure of Silicon Valley Bank (SVB). Right up to the second largest bank failure in the United States, our overseers reassured us that “all is well.” The CEO of SVB was on the board of the San Francisco Fed. Even though SVB had no formal risk officer for nine months in 2022, suggesting that risk—at the core of the recent meltdown—wasn’t being given sufficient attention, SVB’s parent company, SVB Financial Group, was given an award for Bank of the Year earlier in March. As Tho Bishop has reported, the failure occurred just weeks after receiving an auditing thumbs-up from Big Four member KPMG. And earlier in March, in banking testimony, Fed Chair Jerome Powell declared that he saw no systemic risk in the banking sector from the Fed’s aggressive rise in interest rates, even though that was the trigger that caused SVB’s collapse. Shortly thereafter, SVB has become a watchword for oversight failure.

There are ominous implications here, but before discussing these, we must first turn to an underlying misuse of the word “oversight” in public policy. That is the error of equating no government oversight with no oversight at all. In fact, markets involve a great deal of oversight from people with far more detailed knowledge, and more of their own skin in the game: customers, workers, owners, management, lenders, and those seeking to gain by identifying both over- and underpriced stocks.

Milton Friedman explained the likelihood of getting our money’s worth from any spending in “Four Ways to Spend Money:” 

There are four ways in which you can spend money. 

You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. 

Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! 

Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.

That same logic is reflected in government oversight efforts. Consequently, increased government oversight of what happens in markets can actually decrease effective oversight by replacing those who would be better overseers with worse ones. They face all the usual temptations to use their power for political favors and favorites, rather than to protect people and their rights more effectively.

In any event, once a tragedy or crisis like the SVB collapse attracts serious media attention, undermining the previous EGBOK “(everything’s going to be OK”) assurances, politicians routinely respond with the same “solution.” They start with anger, expressions of disappointment, and determination to “get to the bottom of it.” Then political pressures produce potshots, followed by investigations that grow into oversight hearings. There they point fingers at everyone but themselves, and demand immediate fixes, showing what effective public overseers they are.

But this Beltway Kabuki actually proves what ineffective public overseers they are, because their oversight, paraded about after the crisis has occurred, is too little and too late, to help. If politicians were really performing their oversight responsibilities, rather than pretending and preening in public, they would not need circus-tent posturing and hearings to tell them what was happening right under their noses and why. The ex-post oversight officiousness that arises once the public spotlight is turned on proves how inadequate the ex-ante government oversight has been.

Almost every area of American life is overseen by federal and/or state regulatory agencies, as well as by congressional and/or legislative oversight committees. The problem is that overseers, stuck in the bureaucrat-politician complex, often do their job badly. But they normally escape blame because voters pay little attention when a crisis is not (yet) publicly apparent.

When voters are inattentive, politicians reap little reward for effective oversight on their behalf. They advance their own and their favorites’ interests, at the expense of the public they are supposedly standing watch for—until tragedies or crises grab people’s attention and emotions. Then they immediately redirect blame to some other scapegoat. (Note how the Trump administration is blamed for easing some aspects of Dodd-Frank, even though the legislation authorized the Fed to “apply any prudential standard to any bank holding company or bank holding companies” with total assets of at least $100 billion,” which included SVB.)

So where do we see evidence of such oversight oversights?

Politicians treat each crisis as a one-time surprise, leading to a one-time response that aims to move the issue out of current headlines. Meanwhile, we are actually exposed to repeated crises. We should know by now how government can turn on a dime from “don’t worry, be happy,” to “this is Armageddon.” Just remember how our overseers dealt with the emergence of Covid.

Effective monitoring would eliminate the stark contrast between active foot-dragging by overseers when issues are off the public radar and their strident demand for instant solutions, imposed on or funded by others, when things blow up. Inhibiting real reform and then blaming others for the results that follow is political hypocrisy, not oversight.

Failures of political oversight extend far beyond SVB, Covid, toxic train derailments, precursors like the VA scandal, bridge collapses, or the Great Recession. They include a long litany of crises that arise under government’s wandering, rather than watchful eye. And the cornucopia of such results clearly shows that the problem is not just occasional, but systematic. 

Banking oversight, to some extent, may be a necessary evil, but it could be made better by doing the opposite of what the government has in fact done. Roll back deposit insurance instead of expanding it far beyond current guarantees. After all, the insurance was meant to protect those who were unsophisticated in their knowledge of financial mechanisms and markets, which is a far cry from those threatened with losses by the SVB meltdown. 

Reducing deposit insurance would drastically increase the oversight depositors would exercise, including those whose sophistication should make them the best overseers. And since, as John Cochrane points out, deposit insurance “begets risk-taking” by making it artificially cheap, it would go a long way toward reducing the possibility of SVB-style meltdowns.

Cochrane also notes that the Dodd-Frank law, whose minor modification has been errantly scapegoated for SVB, should be simplified or eliminated because of all the serious oversight it has crowded out. It has already “spawned over 30,000 pages of regulations. Do we really need another 10,000 just to spot the oldest risk in the book? It merely needed someone to put two and two—uninsured deposits and long-term assets—together to come up with four.”

These issues are important since we will no doubt soon be expected to trust a “new and improved” oversight regime by those who whiffed in our current crisis. And if history is a reliable guide, the newest oversight promises will likely be no more trustworthy than the old ones. So major oversight oversights will persist as a routine feature of our political environment. If and when those new reforms fail in the future, we will discover too late, again, that in some crucial way, they fit Ambrose Bierce’s definition of reform as “a thing that mostly satisfies reformers opposed to reformation.” We will be reminded that trusting “new and improved” monitoring from those people and structures who have already failed “bigly” at the task amounts to picking a military sentry because he said, “I fell asleep at my last watch, but you can trust me now.”