Saturday, March 2, 2013

Are you all marxists? Why more regulation is not the answer « The Market Monetarist

Are you all marxists? Why more regulation is not the answer « The Market Monetarist

Are you all marxists? Why more regulation is not the answer

Today I participated in a very interesting conference organized by the Danish Institute for International Studies on Central Banking at a Crossroads: Europe and Beyond”.  So far the conference has been extremely good despite the fact that I disagreed with most of what I heard all day. I could write a long post on my reflections on today’s conference, but instead I will just give you the seven headline on papers or blog posts I would like to have written today. Here they are:
1) The Public Choice Theory of Banking Resolution
2) Why Bryan Caplan’s theory of rational irrationality will teach you that deposit insurance is counterproductive
3) Regulators as cheerleaders of the boom
4) Why Goodhart’s law is telling us that macroprudential indicators are useless
5) Why banking crisis is a result of monetary policy failure rather than market failure
6) Bank of Japan’s “dual mandate” – price stability and financial stability. The BoJ failed on both for 15 years.
7) Dodd-Frank and the Patriot act – a reflection of the same kind of regulatory irrationality.
I think you get the drift – I am not too impressed with the idea that the solution to today’s problems is more regulation. Today’s crisis is primarily a result of failed monetary policy rather too little regulation.

Regulation can be different from policing, its should be a part of it though. Regulations are usually to slow things down or make them more transparent and so are Bi. For example speed limits on highways make cars go slower and avoid more chaotic crashes, more deposits in banks slow booms by starving them of capital and tend to make the busts smaller at the risk of economic stagnation. Iv biased policing allows more personal freedom but penalizes them more if they do something wrong, for example in the GFC many companies were prosecuted for fraud that could have been prevented by more regulation randomly auditing companies for deception. So Bi regulations try to create an equilibrium or normal behavior so that deviants to this are penalized, they might have to keep kinds of records that penalize companies wanting to do business faster or innovate in ways that are difficult with killing out these forms. Iv deterrence might allow this innovation but then it has booms and busts where the extremes are penalized, for example in the bust at the GFC ceiling companies were prosecuted but this fraud was ignored before them. At the floor they can also be prosecuted, when the free fall of a market is going on shorting might be allowed but when it hits the floor causing economic wreckage for those companies then they can be prosecuted for damaging companies.

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