Watchdogs Need Not Bark Together

Joseph Stiglitz on financial regulation reform, in the FT (registration required):

[E]ach country looks at each proposal and assesses how it affects the competitiveness of its financial system; the objective too often is to find a regulatory regime that crimps competitors more than one’s own companies. As the saying goes, all politics is local, and, at least in the US and many other jurisdictions, finance is a big political player. This, combined with deep philosophical differences – as remarkable as it may now seem, there are some that still believe in unfettered markets – mean the only agreements that are easy to come by are those involving the least common denominator, or small countries not at the table; and even these victories are often hard fought, as evidenced by the struggle to deal with tax havens.

Given the difficulties in achieving global co-ordination, insisting on such co-ordination may be a recipe for paralysis – just what the bankers who don’t want regulations want. It is perhaps no surprise that they have become among the most vocal advocates of the need for global action.

Mark Blyth and Leonard Seabrooke provide some additional thoughts on the benefits of an unleveled playing field:

Readers may recall that in the 1970s and 1980s the Laffer Curve for taxes imagined a one-size-fits-all Goldilocks solution, where there was too hot, too cold and a sweet spot for taxes. Tax them too hot, they said, and the high-income earners will run. We seem to have a rerun of this argument today. Too light regulation and the national economy implodes. Too much regulation and the bankers run. Where then is the sweet spot that we today refer to as “right-sizing” finance with appropriate regulation?

In this regard Prof Stiglitz points to something fundamentally important: global solutions may not be the appropriate target for financial regulation. However, we would go further. Favouring national autonomy is superior to home regulation where big banks can throw their weight around and dictate terms to widely divergent national economies. While global regulations benefit global banks by enabling them to lower the costs of capital, it is far from clear that these regulations benefit the countries where these banks operate, given the volatility they can produce. Just as the Laffer Curve for taxes can’t explain why Danes, Germans and Americans are willing to pay different tax rates, so the idea of a Laffer Curve for Financial Regulation, with its presumed global sweet spot, is surely fallacious.