A Note on Financial Regulation "Reform"
Too big to do well
Many say that deregulation was the cause of the current financial "crisis" (this in quotes because most probaby we have positive economic growth now). So, well, we are still stuck with politicans needing to be seen to do something to 'correct' the most recent financial "mess" (again in quotes as interest rates are pretty low!) and to prevent it from happening again. And of course there is nothing worse than a 'do nothing' politician, yes?
The well-respected Critical Review's most recent double issue is on the crisis. Yes, perhaps, some financial deregulation took place (not that market players weren't already doing the things that the deregulation then made legal: transactions drive policy, policy doesn't drive transactions, and who is to say, what objective metric can be used, to determinine if any deregulation was greater or lesser than any other market distortions placed on market actors during any given period of 'deregulation'). Any deregulation of the last, say, 10 years, just peeled back some layers of ad hoc, counter-and adverse-policy incentives, however well-intentioned, that have been added-on to the US financial system over the last 75 years (including said years of deregulation). It wasn't 'deregulation' that took place, merely adjustments to existing regulation. Certain layers of the onion were peeled back but the regulatory onion was rotten from the core out.
For example the FHA and Fannie Mae and Freddie Mac incentives to creating lending for people that can't afford their own homes wasn't changed. (Initially put in place 75 years ago to encourage home-ownership and prevent organized communism, something that still is government policy today, despite the death of communism as a viable political option). The mortgage interest write-offs which encourages debt creation by individuals weren't changed. And most importantly the Federal Reserve too big to fail "systemic risk" bailout policies haven't changed one iota, and in fact have gotten worse because have now expanded way beyond just banks themselves. And the fact that "too big to fail" was so universally and widely applied has just meant that "bailout" has become an accepted policy option, thus creating more adverse incentives against prudent funds-management on behalf of the the regulated.
So as we debate "super-regulators" versus the Fed as the regulator of the financial sector, Workers votes for "anyone but the Fed" (kind of like "none of the above" but more pragmatic). The Fed is supposed to control inflation through the money supply and interest rates (whether they can actually do this or if this does more harm than good is beyond this posting). The Fed regulating the financial sector as well as controlling monetary policy is kind of like the fox guarding the hen house.
The Fed as regulator then has incentives to target, support and direct resources towards those that do what they say, while those that don't do what they say lose their favor (and, well, shall we say, are forced into bancruptcy). This just creates anti-competitive, Fed-created, financial monopolies and the user of financial services (all of us) lose due to anti-competition as there becomes less and less, and bigger and bigger, financial institutions to work with. Fees charged by the 'regulated' increase as monopoly power created by the 'regulator' increases.
The answer is to decouple Fed oversight of banks from the Fed's authorization of inflation control. The answer is certainly not to give the Fed more regulatory oversight. Too much power in any one institution is bad for a free society. The market can, and does, compete away private monopolies over time, but a government-created monopoly can have no competition.
Many say that deregulation was the cause of the current financial "crisis" (this in quotes because most probaby we have positive economic growth now). So, well, we are still stuck with politicans needing to be seen to do something to 'correct' the most recent financial "mess" (again in quotes as interest rates are pretty low!) and to prevent it from happening again. And of course there is nothing worse than a 'do nothing' politician, yes?
The well-respected Critical Review's most recent double issue is on the crisis. Yes, perhaps, some financial deregulation took place (not that market players weren't already doing the things that the deregulation then made legal: transactions drive policy, policy doesn't drive transactions, and who is to say, what objective metric can be used, to determinine if any deregulation was greater or lesser than any other market distortions placed on market actors during any given period of 'deregulation'). Any deregulation of the last, say, 10 years, just peeled back some layers of ad hoc, counter-and adverse-policy incentives, however well-intentioned, that have been added-on to the US financial system over the last 75 years (including said years of deregulation). It wasn't 'deregulation' that took place, merely adjustments to existing regulation. Certain layers of the onion were peeled back but the regulatory onion was rotten from the core out.
For example the FHA and Fannie Mae and Freddie Mac incentives to creating lending for people that can't afford their own homes wasn't changed. (Initially put in place 75 years ago to encourage home-ownership and prevent organized communism, something that still is government policy today, despite the death of communism as a viable political option). The mortgage interest write-offs which encourages debt creation by individuals weren't changed. And most importantly the Federal Reserve too big to fail "systemic risk" bailout policies haven't changed one iota, and in fact have gotten worse because have now expanded way beyond just banks themselves. And the fact that "too big to fail" was so universally and widely applied has just meant that "bailout" has become an accepted policy option, thus creating more adverse incentives against prudent funds-management on behalf of the the regulated.
So as we debate "super-regulators" versus the Fed as the regulator of the financial sector, Workers votes for "anyone but the Fed" (kind of like "none of the above" but more pragmatic). The Fed is supposed to control inflation through the money supply and interest rates (whether they can actually do this or if this does more harm than good is beyond this posting). The Fed regulating the financial sector as well as controlling monetary policy is kind of like the fox guarding the hen house.
The Fed as regulator then has incentives to target, support and direct resources towards those that do what they say, while those that don't do what they say lose their favor (and, well, shall we say, are forced into bancruptcy). This just creates anti-competitive, Fed-created, financial monopolies and the user of financial services (all of us) lose due to anti-competition as there becomes less and less, and bigger and bigger, financial institutions to work with. Fees charged by the 'regulated' increase as monopoly power created by the 'regulator' increases.
The answer is to decouple Fed oversight of banks from the Fed's authorization of inflation control. The answer is certainly not to give the Fed more regulatory oversight. Too much power in any one institution is bad for a free society. The market can, and does, compete away private monopolies over time, but a government-created monopoly can have no competition.
posted by Cameron Weber at 6:43 PM
