A quick note on “deregulation,” which is the other half of the mantra, i.e., the phony growth recipe–“tax cuts and deregulation”–you hear endlessly repeated in uninformed DC conversations.
I’ve been in these conversations for decades and I have no idea what these people are talking about and neither do they. What, specifically, do they want to “deregulate?” What evidence do they have that to do so would be pro-growth? Obviously, they’re just hand waving.
To take a timely example, the House is about to vote on the “Choice Act” today, designed to repeal most of the regs in Dodd-Frank. The bill will likely clear the House but needs D votes in the Senate where, hopefully, it is likely to come up short.
Now, consider this, from yesterday’s WSJ, touting favorable conditions in financial and credit markets:
The banking system is more resilient because of the regulations since 2008, as firms shifted away from short-term borrowings without collateral…Instead, banks are issuing longer-term debt in the low-yield environment as a way to reduce rollover risk, the risk from having to replace maturing debt.
It’s one example of a regulation having its intended impact–I was there at the creation of Dodd-Frank, and I assure you, this was one of its targets–one that in this case, is boosting market stability and pushing back of the Minsky’esque risk underpricing that regularly occurs around this time in the cycle.
One could surely find counterexamples, and believe me, I’m sure there is brush to be cleared in our regulatory system. I’ll even go so far as to admit that Trump has a point re how long it takes to get infrastructure builds underway.
But sweeping allegations are meaningless. You’ve got to get down to cases, and when you do, you will find that many regulations are there for a good reason and they’re working as intended.
But I dare you to compare a safer banking system to our current dangerously misregulated one, with so many systemic risks on steroids
My greatest fear is that linguist George Lakoff’s view of half the country isn’t an exaggeration – that conservative people really do respond only to base emotional messages, and reason is futile.
Regardless, his suggestion to reframe regulations as *protections* makes a lot of sense.
There just are not any regulations that will save banks if the Fed pursues bad policy. In Sept 2008, the Fed funds rate was 2% Three weeks later, it was 0%. Peevish focus on inflation then, as now, caused unemployment to skyrocket beyond what it should have. If you had good credit, 20% down, and your income was documented, you were still gravely at risk of default because unemployment rose well beyond what credit models had baked in. Consequently, home prices fell well beyond what they should have. Home prices are a function of expected future nominal income. When nominal income falls, so will home prices.
Banking regulations need to be simplified. Simplifying stress tests, capital requirements, model risk management, liquidity requirements, and disclosure does not mean eliminating them. Right now they are an overly complicated mess and too many bureaucrats have their hand in too many obtuse rules unrelated to actual risk. Banking right now is in a state of soft-nationalization. Having bureaucrats reading individual loan documents and second guessing credit officers from an armchair does not reduce risk. BASEL and regulatory requirements end up being a negotiated set of compromise rules that bear little resemblance to actual risk.
We also need to recognize the fact that big banks love big regulations, because frankly small banks cannot afford compliance (especially model validation, where validators get paid as much as financial engineers on the trading floor). And the Treasury also loves big banks, because it’s much easier to ideal with a few large banks when it comes to money laundering and other financial crimes.
Spare me the hysteria that banks will fail. Of course they will fail. Especially if the Fed pursues bad policy. Which so far its still doing. Bad fed policy causes systemic risk. Banks need to be smaller, more nimble, free to innovate, and most importantly free to fail when they make bad loans based on bad credit models. So long as banks are required to hold enough capital and liquidity to make depositors whole, there is should no problem with banks failing.