Finally Frog takes down the box, cuts the string, opens the box, and gives all the cookies to the birds.
“Read more, Daddy,” my daughter says.
“One moment, I have to tell all the nice people the moral to the story.”
On last Friday’s Planet Money, Alex Blumberg talked to Republican Congressman John Campbell (starting around 24:30), who happens to be on the House Financial Services Committee. According to Campbell, there are three broad regulatory designs under consideration:
- Break up the banks and impose rules to keep them small (simple size caps).
- Allow large banks, but impose stringent regulations on them.
- Similar to 2: Allow large banks, but impose regulatory constraints that increase with size (for example, increasing capital adequacy requirements), so that at some point being large becomes unprofitable.
These may all seem like plausible solutions when you look only at economic considerations, but not when you consider political factors. The most fundamental problem is that as long as you have big banks, they can climb the ladder, take down the box, cut the string, open the box, and eat all the cookies. For example, when Citigroup merged with Travelers in 1998, there was this thing called the Glass-Steagall Act, which prohibited mergers between banks and insurance companies. Sandy Weill, chairman of Travelers, said at the time: “We are hopeful that over that time [two to five years] the legislation will change . . . We have had enough discussions [with the Fed] to believe this will not be a problem.” Sure enough, the legislation changed.
Options 2 and 3 allow banks to become big and then use their power to weaken the regulations. Frog should have put the box on the shelf, climbed down, and smashed the ladder. Yes, someday he might have built a new ladder, and no regulatory scheme can serve its intended purpose forever. But the simpler it is, and the weaker the parties who want to undermine it, the stronger it will be.
Originally published at the Baseline Scenario and reproduced here with the author’s permission.