There is often a conflict between policies that make things feel good in the short term and policies that are optimal in the long term. This is one reason why I am quite pessimistic about global warming: the world’s political systems are not well suited to tackling this problem.
Perhaps the best-known example in the economic field is the national debt. Decisions to reduce the national debt (higher taxes and/or lower spending) are extremely unpopular in the short term and only bear fruit in the distant future. I therefore expect that our budgetary position will deteriorate over time. Indeed astonishingly, this only became unsustainable in mid-2010.
Bank regulation is another area where this problem arises. The best regulatory structure is probably no regulation at all. Unfortunately, the introduction of deposit guarantees and ‘too big to fail’ have made this option unfeasible. Without regulation, banks would have the incentive to take wildly excessive risks with taxpayers’ money. One option would be to abolish both deposit insurance and banking regulation.
The next best policy is higher capital requirements. But these are often so complex that smart banks can occasionally find ways to circumvent the intent of the rules.
And then there is “more supervision”. This is roughly the equivalent of a politician telling voters that they plan to reduce the budget deficit by tackling “waste, fraud and abuse.”
A recent article in Bloomberg I noticed:
President-elect Donald Trump’s advisers are considering how to reshape the Federal Reserve’s leadership, including elevating Fed Governor Michelle Bowman as the central bank’s next vice chair for supervision, according to people familiar with the matter. . . .
She has spoken extensively on banking regulation, often to community banking audiences. She strongly opposed Barr’s bank capital proposal, part of an international agreement known as Basel III designed to prevent future bank failures and another financial crisis, arguing that higher capital requirements would likely curb lending activity at a time when the banking sector was healthy. . Instead, she has said banks need better supervision.
Why not someone like Christopher Waller?
Fed Governor Christopher Waller, who has previously considered a possibility of becoming chairman may no longer be seriously considered after he backed a half-point interest rate cut in September, people familiar said. Trump called the larger-than-usual Fed cut just weeks before the presidential election, “a political move to try to keep someone in power.”
Even under the best of circumstances, it is unlikely that better supervision would adequately address the problems in the banking system. But after the recent reversal of the Chevron decision, banking regulation is even less likely to be effective. Here it is Amy Howe:
In a major ruling, the Supreme Court on Friday sharply cut back on the power of federal agencies to interpret the laws they enforce, ruling that courts must rely on their own interpretation of ambiguous laws. The decision is likely to have far-reaching consequences across the country, from environmental regulations to health care costs.
Banking regulation is based on some of the most ambiguous laws in existence.
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