Tuesday, December 17, 2013

Calomiris and Haber on the politics of bank regulation

Foreign Affairs has a very nice article "Why Banking Systems Succeed -- And Fail: The Politics Behind Financial Institutions" by Charles Calomiris and Stephen Haber.

This is a healthy tonic for all us economists who seem to specialize in clever complex advice for the benevolent monarch sort of policy. It's a good reminder of just how counterproductive our bank regulation is for economic ends, and how it serves well political ends.

They cover English vs. Scottish banking, US vs. Canada, and the roots of the dysfunctional US system that crashed in 2008. They are light on the current situation, but it isn't hard to see the same groups feeding at the public trough before receiving tribute now.

Public choice often seems depressing, as if ideas don't matter at all. But they do, and the last few paragraphs are thoughtful.
Within a democracy, effective reforms in banking require more than good ideas or brief windows of opportunity. What is crucial is persistent popular support for good ideas.
It does no good to assume that all the alternative feasible political bargains have already been considered and rejected.As George Bernard Shaw wrote, “The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” Meaningful banking reform in a democracy depends on informed and stubborn unreasonableness.
"Informed and stubborn unreasonableness." I like that a lot better than "tilting at windmills!"


  1. Completely agree. Right now we are still clinging to failed ideas of the last 5 years. That's more gov spending to fight the Great Recession. And a refusal to address tbtf, deficits, and regulation. Maybe most disturbing is we have no idea how to go back to capitalism. I don't want to live in a world where we continue to bailout banks

  2. Well, we have the Consumer Finance Protection Bureau (CFPB) now, so we should all feel safer. Clearly, the problem with the old regime (FDIC, FSLIC, FINRA, SEC, OCC, FED, OTS, and OFHEO) was there wasn't enough redundancy is the system.

  3. FSLIC went out after the S&L crisis. That was nearly 25 years ago.

  4. Eric,
    Start writing your blog again. Really enjoyed your writing


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.