The Whys and Wherefores of Banking Messes A friend from South Africa observes Proper banking regulation can be implemented. Canada has had NO systematic banking crises since 1840, whereas the US has had 11. There is no substitute for rigorous rules for regulating banks, and professional regulators (that dont come from or go to the banking sector). I had a running argument with Milton Friedman, my mentor in economics. He argued regulation was destined to fail, especially in banking, because of regulatory capture, the idea that regulators become of the captives of those they regulate. I researched and wrote a private paper for him explaining that was not true for the most part in several Scandinavian countries. His response was, Yes, but we live in the United States. My rejoinder was, True, but it does have to be this way. In America, we are a lawless bunch. For all the laws on the books and the surplus of lawyers, you would think we could do better. But the truth is, even in the big law firms, there are far too few good lawyers who can litigate well and far too many influence peddlers. Courts could also do much better. Congress, well corrupted by money, as we all know, is the problem. It inadequately regulates lobbyists, the revolving door between regulatory agencies and the private sectors they regulate and the implicit promises made for good compensation and a new job upon leaving government next time. It is, I suggest, unrealistic to expect congress to do much, beholding as it is to lobbyists and their campaign contributing clients. Clean up and good regulation will have to await serious campaign finance reform and a good flushing of the toilet that is Washington. But for how, the questions are how long can we afford to wait and can we really afford the costs of the resulting messes.
Posted on: Tue, 20 Jan 2015 12:16:25 +0000
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