Saturday, March 2, 2013

The Dangerous Myth that Financial Regulation is Unrelated to Financial Crime

Long defines the U.S. as engaging in “overregulation,” by which she means greater regulation than City of London banks experience.  That operational definition of regulation demonstrates that she sees financial regulation as having no value, for the “logic” of a race to the bottom is that all nations will be forced to deregulate and desupervise finance.  Some of the rules may remain in place, but they will not be enforced.

There can be a race to deregulate for advantage but this just creates more of an Iv-B and V-Bi disconnect, this is not always desirable if it makes an Iv-B boom and then bust.
Long’s anti-regulatory logic should cause us (and her) to ask a series of questions.  If financial regulation has no value, then the race to the bottom is a distraction – we should immediately eliminate financial regulation regardless of what the City of London does.  Conversely, if financial regulation were valuable to society it would be vital to break the perverse dynamic of the race to the bottom. If the U.S. adopted the “clear, simple rules” that Long favors (whatever those rules are) and the UK adopts “clear, simple rules” that are much weaker in restraining banks what does Long want us to do in response to the UK’s race to the bottom?

Iv-B can have a race to the top in a boom or a race to the bottom sometimes as a bust but also this can be more controlled such as selling short. A boom is where people race to invest because prices will go up, a race to the bottom of floor is where the minimum price will be and a turn around point. Sometimes these banks can be in a race to the bottom where they need to divest themselves of problem assets or restructure, those that do this first will have a competitive advantage in a coming boom. At other times there can be a race to the ceiling for regulations where investors might flock to areas perceived as less corrupt, this happened for the US in the GFC where money went there. 

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”  George Akerlof (1970).
This only occurs in a disconnect when I-O regulators are weak.

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