The Washington Post gives a generous portion of its Sunday editorial section to Eliot Spitzer.

Today’s balkanized regulatory framework for financial services no longer matches in any way the needs of a fully integrated global financial system. The divisions of the past — commercial banking vs. investment banking vs. insurance vs. hedge funds vs. private equity — have become distinctions without a difference.

In a less balkanized environment, the state attorney general of New York would presumably have been a non-player. Also, insurance would not be regulated at the state level. A commenter on a previous post pointed to this article.

Six months before the CFMA became law [in 2000], the New York State Insurance Department decided that it wasn’t going to regulate credit-default swaps. The decision in New York mattered because that is where almost all the credit-default swaps in the United States are traded.

The article argues that credit default swaps are insurance contracts and that they ought to be regulated as such. I am not sure that I agree. Rather, if I agree, then I think that the argument implies that mortgage securities and perhaps other financial vehicles with option characteristics need to be regulated as insurance.

Back to the larger point. It is tempting to say that coherence in regulation would be solved by having a single regulator. But that is not the case. I have been saying that bank capital regulations are incoherent, even though the FDIC sets those regulations. Creating a Department of Financial Security would only create a more coherent structure on an organization chart. But just as it is perfectly possible to mismanage FEMA under the Department of Homeland Security, it is perfectly possible to mismanage any sector of financial regulation under a central regulatory czar.

My general view is that centralization is becoming less and less useful as specialization in information increases. Re-organizing Washington and adding to its power is ultimately going to prove harmful, not helpful.