Faith-Based Regulation
So, the Senate passed their 1,500 page financial regulation bill. Sen. Harry Reid crowed, "When this bill becomes law, the joy ride on Wall Street will come to a screeching halt." President Obama assured Americans, "Our goal is not to punish the banks, but to protect the larger economy and the American people from the kind of upheavals that we've seen in the past few years."
Yes, just like Sarbanes-Oxley protected the larger economy from the financial upheavals in 2008. In regulations we trust.
Regulations have become the modern era's equivalent of a rain dance. It's 1,500 pages of horse-trading and political gyrations to make us feel like we've actually done something to prevent economic downturns...even though there is little evidence to suggest it will do anything of the sort.
In fact, GMU economist Arnold Kling points to an IMF study that looked at bank compliance with "Basel Core Principles" -- that is, regulations that require banks to hold a minimum amount of capital against liabilities, so that they can survive an economic shock -- and basically asked: does compliance with regulations make banks more sound? Here is what the study concludes:
All in all, we do not find support for the hypothesis that better compliance with BCPs [Basel Core Principles] results in sounder banks.
Kling comments:
This is an unusual sort of paper, in that it tries to look for evidence that regulation works. Ordinarily, economists proceed directly from the observation that market results are imperfect to the conclusion that regulation is the solution. Faith-based regulation, as opposed to evidence-based regulation.
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