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Matthew Slaughter: We need One Institution as a Systemic Regulator — Not Ten

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While the drama continues to unfold in Europe, back in the United States, questions about the U.S. banking system's exposure to the European Debt Crisis remain largely unanswered.

I recently had the opportunity to speak about these questions with someone who served on the White House's Council of Economic Advisers during the 2008 financial crisis, Matthew Slaughter.

Currently, the Associate Dean of the MBA Program at Dartmouth's Tuck School of Business, he has a resume as long as your arm. He's also a professor of management at Tuck; a Research Associate at the National Bureau of Economic Research; a Senior Fellow at the Council on Foreign Relations; a member of the academic advisory board of the International Tax Policy Forum; an academic advisor to the Deloitte Center on Cross-Border Investment; and a member of the U.S. State Department's Advisory Committee on International Tax Policy Forum.

Here's what Slaughter had to say.

MS: I'm not that confident the decisions the European Union leaders are making will address the issue of who is going to incur losses on existing debt. It's almost paradoxical- restructuring the treaties to form a stronger fiscal union. I get the principal of that but I don't think it addresses the long term problems facing these sovereigns. The sovereign countries don't have the revenues to make up the deficit.

We saw this movie 20 years ago on December 9 in 1991 when 12 leaders of the European community signed what was called the Maastricht Treaty that formally launched the European project.

People forget but that criteria was going to limit the governments to have fiscal deficits of no more than three percent of GDP per year and it was ratified after that. A generation ago the Eurozone would monitor each other to make sure the rules would be in place. So why are these statements any more credible than the ones they made 20 years ago? The revenue streams both in the near term and long term still need to be addressed.

LL: Roger Altman recently said the financial markets have become 'a global supra-government, forcing major policy changes like austerity and ousting political leaders. Will we see more of this?

MS: The big political question is will they impose the austerity measures that are needed and will the public be ok with it. Look at Ireland where real income is being taxed now 20-25 percent.

Politicians in these other countries need to make similar choices. The number to be looking at is: 62.5 percent. That was the debt to GDP ratio in Argentina at the end of 2001 just before they triggered to default.

LL: Since the financial crisis, we have all learned just how connected we are in the global economy. Are you concerned about the American Banking system?

MS: We have not put in place a robust informational regime at the Fed and other global regulators to know just how interconnected these key institutions are across the world. The balance sheets of US banks are better than three to four years ago but there is a lot of connectivity in the US-Europe banking system. Crisis is something we can't predict and what we saw with Lehman is it's that uncertainty that could freeze things up.

LL: I hear over and over again by many in the industry because of the banking system's "complexity" it is hard to connect the dots of exposure between the European Banks and US Banks. Wasn't Dodd-Frank suppose to shed light and give greater transparently with a "system regulator?"

MS: One of the problems with Dodd Frank was the creation of a systemic regulator. While greatly applauded by the financial stability oversight council, Dodd Frank diffused the responsibility across ten different agencies in the US. Having sat in many meetings with Neel Kashkari while I was at the CEA and the predecessor which was the President's Working Group on Capital Markets, there's just less of a focus and less of an incentive for any of those ten agencies to really focus on this. Its part of the complexity of the problem.

LL: So basically too many cooks in the kitchen?

MS: Yes. My recommendation would be to only have the Fed because you want one institution that internalizes this problem.If I had a magic wand, I would want the Fed and Central Banks to publish their systemic information out in the public so everyone included analysts, economists can review the data. We need to have a strong and robust banking system and too big to fail has not been addressed yet.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."