Regulation is Not the Problem: Over-Regulation Is
Submitted by Marcus Rothaar
Some bankers and economists will argue that there is no need for banking regulation, and we should just allow the private sector to create the appropriate incentives to protect against the inherent risks to both the system and consumers. While fodder for an interesting philosophical debate, don’t expect this free market utopia to make an appearance anytime soon. Regulation is here to stay.
Blame it on the Great Depression (one little Great Depression and everyone gets all scared for the next century). Blame it on the S&L crisis. Blame it on the subprime mortgage meltdown. Monday morning quarterbacking is an American pastime, and the all-star team resides in Washington. Right or wrong, the knee-jerk reaction to past financial crisis has always been to double down on regulation. But regulation by itself is not the problem. The danger lies in the difficulty of balancing between over and under-regulating. Safety and soundness may be compromised without the proper rules in place; but too many rules, or not the right rules, can ultimately end up hurting the consumers they are intended to protect.
My daughter’s kindergarten class has a jar of warm fuzzies. When the entire class behaves well, a warm fuzzy (cotton ball) is put into the jar. When the class misbehaves, a fuzzy might be taken out of the jar. When the jar is filled to the brim, the class is rewarded with a prize such as extra recess time or a special snack. The challenge of course is that one bad seed can ruin it for everyone. If everyone is quiet during story time except for little Johnny, it means no new warm fuzzies for the class. In the banking industry, a few little Johnny’s have ruined your chance of getting any warm fuzzies.
