Last weekend, the New York Times and the Wall Street Journal ran dueling op-eds on the state of financial regulation. Each piece argued about what you’d expect.
In the Times, Stanford’s Anat Admati proclaimed “We’re All Still Hostages to the Big Banks”:
Nearly five years after the bankruptcy of Lehman Brothers touched off a global financial crisis, we are no safer. Huge, complex and opaque banks continue to take enormous risks that endanger the economy. From Washington to Berlin, banking lobbyists have blocked essential reforms at every turn. Their efforts at obfuscation and influence-buying are no surprise. What’s shameful is how easily our leaders have caved in… (emphasis added)
Admati’s solution? Impose stricter rules on fat cat financiers.
George Melloan’s WSJ piece argued the opposite. Entitled “Bankers Haven’t Gone Rogue — Regulators Have,” the article blasts bureaucrats for “wheeling and dealing, making rules, twisting arms, plotting civil actions, and levying fines”:
Regulatory mania is encouraged by the Obama administration, which struck political gold in 2012 by blaming the nation’s economic ills on the rich … The legislative and regulatory assault has done serious damage (emphasis added).
An elite academic criticizes capitalists; a conservative condemns overregulation. Seems like standard fare. But when we look beyond the tired, old narrative of right-wing business backers versus left-wing government cheerleaders, a surprising truth comes into focus:
Both critiques are on point.
Big banks do have it too easy. Per the chart below, America today is just as reliant on a few colossal institutions as before the meltdown. This is great news for those deemed too big to fail: Bloomberg View estimates that implicit guarantees boost megabank profits by more than $80 billion. Less lucky are the smaller firms that receive no such subsidy — not to mention the taxpayers.
But it’s also true that bureaucrats clumsily chaperoning banks through the minutiae of their operations won’t solve anything. It’s taking regulators an eternity just to write Dodd-Frank’s rules, injecting damaging uncertainty into markets. If and when they finish, compliance costs will devour yet more productive resources. Huge institutions can easily afford enough lobbyists and lawyers to navigate these rough waters. Smaller community banks? Not so much.
Both liberals and conservatives are right to criticize this worst-of-both-worlds status quo. Fortunately, AEI’s own Jim Pethokoukis and others have mapped a way out: Government should significantly increase banks’ equity requirements, then step back and let markets adjust. It’s simpler, fairer, and more pro-market than Dodd-Frank’s messy micromanagement — and it would strike directly at the heart of “too big to fail.”
These proposals cut across ideological lines to address both op-eds’ complaints. When it comes to taming the megabanks, left and right should unite.