Labor Market Indicators
links for 2009-09-22

Our Only Chance to Improve Financial Regulation Is Now

Ah. When Clive Crook is not putting his thumb on the scales to hide the fact that the arguments of America's Republicans weigh no more than a feather, he is his old self again, saying smart things:

Deal with the banks while they are down: One of the clearest messages from the first summit of this crisis, in November last year, was the collective commitment to hold back protectionism. Since then, every government has been bending or breaking international rules... they have shown some restraint, for which one is grateful.... On the very eve of the Pittsburgh summit, Barack Obama’s administration raised tariffs on Chinese tyres. This was probably technically legal under the World Trade Organisation’s “safeguard” procedures. It is protectionism nonetheless, and in plain breach of the earlier commitment, which Mr Obama has repeatedly affirmed. We shall see whether kneeling down to the unions in this case abates the demand for further protection, or stimulates it. My guess is the latter.

Ordinarily, this gap between words and deeds is a shame but not a disaster.... [T]he optimal policy of economists’ fantasies often calls for co-ordination.... But the point is that domestic politics, especially in the US, all but rules out this sort of co-operation. Balanced growth requires a dramatic change in US fiscal policy. The US has every selfish reason to do this unilaterally. In the end it will, even though the country cannot yet bring itself to think about it. But if the administration was ever to ask Congress to raise taxes because the US had promised other countries that it would curb its public borrowing, that would doom the proposal on the spot. Muddling through is the best that can be done, and more often than not it suffices.

Why then is 2009 different? Because stronger financial regulation is now so central in what needs to be done – and because unco-ordinated financial regulation, unlike unco-ordinated fiscal policy, cannot succeed.... Tim Geithner, the US Treasury secretary, won tentative, sometimes grudging agreement to his main ideas for stronger regulation... requiring banks and shadow banks to hold more capital.... [H]e also called for minimum levels of liquidity, and for “living wills” to allow the orderly winding up of failing financial firms. All this makes excellent sense.... [B]ank regulation better had be strengthened, and in a closely co-ordinated way, or else governments will be leaving their countries as exposed as before to the risk of another financial crisis....

[G]overnments will need to stick together in facing down the pressure for a less onerous bank capital regime. If co-ordination fails and some governments adopt tougher rules than others, this pressure will be far stronger, probably overpowering. Banks and shadow banks will argue that stronger capital rules in the US, for instance, put American financial institutions at a competitive disadvantage. It will be true, and Congress is fiercely attentive to that kind of argument.... The presidents and prime ministers meeting this week are not going to nail those details down. But they can affirm the principles of Mr Geithner’s proposals without equivocation. They can mean it. Most important, in private, they can come to a frank understanding: they will have to press the issue far beyond the point at which their financial firms start to complain, and resolve to stick together.