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September 13, 2011

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Kim Krawiec

I'm with you, Dan. It's not that financial institution regulation is unique and certainly is not the case that we can't learn from a study of the regulation of other subject matters. It's just -- to my mind -- that some of the systemic risk provisions of D-F have a potentially different political economy than some of the other D-F provisions, such as consumer protection (which, by definition, consumers can at least see how the subject relates to them) or even the derivatives clearing and trading provisions (which arguably could pose barriers to entry issues).

Though now that I say that, perhaps it is the case that each issue is both similar and different in important ways -- from my outsider's perspective, the compensation debates seem to be their own animal as well, though I haven't followed them as closely as others have. But given that we don't know the end result of most of D-F yet, that conclusion certainly could be premature.

In any event, thanks for the posts and the links.

Cristie Ford

Hi Dan,

Thanks for this wonderfully thoughtful dissection of the problem. I agree with you and Kim that financial regulation doesn't seem to be really different from other areas of regulation along any of the important parameters - complexity, the ability to externalize costs, salience and the cyclicality of that salience. In fact I often wonder whether new governance scholars working in other subject matter areas might benefit from paying more attention to financial regulation and its recent problems than they do. I'm not so sure it can't happen there.

Taking a flier here, is it possible that financial regulation is different because in that context it is easier to argue that we can have our cake and eat it too? Financial innovation and regulatory scholars sometimes speak as though the pros and cons of regulation, and innovation, are the same in kind. Leaving aside wealth transfers through rent-seeking, which few would defend, academic economists see their goal as maximizing the efficiency of capital use. They may determine that zero regulation maximizes it or that lots of regulation maximizes it, but the underlying conviction continues to be that more efficient use of capital lifts all boats. By contrast, the pros and cons of environmental regulation are different in kind. We are weighing polar bear habitat, climate change, etc against decreased power generation, smaller profits, etc. Okay, I see the analogical leaps in my argument here but I'd still argue that, because the relative values placed on polar bears vs. cheap energy are largely subjective, it is tougher to come to an agreement on what level of regulation maximizes welfare. It is also necessary to confront hard choices. In finance, there is always the seductive possibility of getting to have your cake and eat it too. What if we deregulated, and we all got richer?

Brett McDonnell

I largely agree that financial regulation is not fundamentally different. Indeed, most of the ideas that all of us have been discussing here have been drawn from more general literature that is not specific to finance. But in addition to some of the differences in detail that Dan, Kim, and Cristie discuss above, I want to mention one thing that has not yet received enough eattention in this forum (including from me).

The growth of financial markets over the last few decades is closely tied to the growth in economic inequality over that time. The growth in inequality has many causes, but financial markets are a big part. The super-rich are that way often because of investments in the financial markets. Top public company officers have gotten rich through equity compensation. Investment bankers, accountants, corporate lawyers, and yes, law professors, have also eaten from this gravy train. The fight to control the growth of financial markets is thus tied to the fight to control inequality in a way that is not at all true for environmental regulation. Even our rather antiseptic talk about systemic risk is linked to this. I have been shocked that for most of the last two years until the last couple of weeks, we have been talking much more about deficits than jobs. That is possible only because of who exercises power in this country. Think too about the anger that showed through in the comment letters from ordinary people that Kim discusses.

Hmm, in my papers I've been a rather centrist Obamaite. My last post veered towards a much more minimalist libertarian position. Here I'm sounding like a radical populist. I seem to be becoming unhinged on (by?) this topic.


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