Last week I was in a discussion about financial regulations where everyone seemed to agree that the international nature of financial markets is a huge impediment to effective regulation. In response, I raised the heretical notion that maybe we need to revisit the conventional wisdom that’s developed against capital controls.
Nobody really seemed to agree [...]
Last week I was in a discussion about financial regulations where everyone seemed to agree that the international nature of financial markets is a huge impediment to effective regulation. In response, I raised the heretical notion that maybe we need to revisit the conventional wisdom that’s developed against capital controls.
Nobody really seemed to agree with that. And I wasn’t surprised. But still. It’s not controversial, even among pretty serious free market types, that some kind of effective financial regulation is necessary. Nor is it controversial to observe that any given country could still be subjected to “systemic risk” emanating from a differently-regulated foreign country with which it has economic ties. Nor is it controversial to observe that firms actively seek to engage in “regulatory arbitrage,” i.e. take advantage of opportunities to dodge regulatory burdens by, among other things, taking advantage of nation-to-nation difference in regulation. Last, it’s not at all controversial to observe that holding a big global summit to write financial regulations would almost certainly not work—it would be desirable to achieve international coordination, but there’s no way to make it happen in a timely manner.
So given all that how sure are we, really, that capital controls and effective national regulation isn’t the second-best solution? Happily granting that free flow and effective global coordination is the first-best solution, why does that mean that free flow of capital absent an effective international regulatory regime is second-best? We sure do seem to have witnessed a lot of bubbles and financial panics in the past ten years. Almost like what used to happen in the U.S. domestic economy before we created an effective centralized regulatory-and-monetary authority.
But I’ll happily grant that on this subject I don’t really know what I’m talking about. But this post from Paul Krugman is food for thought.
0 Responses to Admittedly, I Don’t Really Know What I’m Talking About, But… (Part I)