Appearing over at the City Journal website, Nicole Gelinas has published a nice article exploring why the likelihood of coordinated, multilateral financial regulation reform is scant. The upshot, according to Gelinas:
“So far, no nation has credibly disavowed the notion that its financial sector can continue to expect bailouts in future crises. A credible system to enforce market discipline on financial firms would require national regulations that make it easier for financial markets to withstand failure, including limits on borrowing and mandates for financial instruments—such as credit derivatives—to trade on central exchanges. Because lenders to financial institutions are confident that a national government will bail them out, they continue to lend at lower rates—thus providing the subsidy.”
This is indeed the reality.
We must be willing to sacrifice a little short-term economic performance to craft stronger regulations. The business that we lose in the world of high finance will eventually come back to Wall Street if our new regulatory regime is fair-minded, sober, responsible, and not merely a punitive attack on the bankers. Once banks sense that our regulations are not capricious, the new system will encourage participation worldwide. We needn’t fear regulation when it is deployed in the proper spirit and targets the right set of goals. The first goal is protecting the public purse, which seems impossible if we’re going to bail out every hard case on the Street.
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