« Is Raising Marginal Tax Rates on Higher Income Individuals a Good Idea? Becker | Main | Is Banking Unusually Corrupt, and If So, Why? Posner »

07/22/2012

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Jimbino

The big question is: how much does regulation cost the consumer in medicine, drugs, education, utilities, radio spectrum, insurance, etc.?

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Two things. First, over the past thirty years, banks have experienced a less regulated environment, culimating in the repeal of Glass-Steagall in 1999. Second, the major problem with the banks has been the Principal-Agent problem (see J.P. Morgan's recent $4-6 billion trading loss). There have been too many opportunities for bankers to take excessive risks which can net high compensation when right, but few consequences when wrong. Canadian banks with their more-heavily regulated system, seemed to escape much of the financial crisis.

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EJUsher

An unregulated industry that manages large amounts of money would likely attract a greater number unscrupulous individuals who are willing to cut corners than the highly regulated industry that we have today. While the regulation of our financial industry does not foreclose the possibility of financial chicanery, it allows the honest market to function on a day to day basis. If it were unregulated, there would be no trust in the market, or somewhat less trust than there is today. The regulations serve their purpose as a deterrent, but they may be deterring fewer malefactors than they have in the past fifty years.

J

I don't see how it follows that regulated industries will attract more people willing to cut corners. Following your drug violence example, the opposite conclusion seems evident to me. Becuase there is no regulation in the drug business (for the poeple who participate in it) those who are willing to be ruthless and use violence to achieve their goals have an edge, so it'll attract drug dealers who are willing to take risks.

Christopher Calton

" However, a highly regulated industry that manages enormous sums of money is likely to attract more than the average number of individuals who are willing to cut corners and violate regulations and laws, and sometimes their own company’s rules, in the attempt to make very large incomes for themselves. "~

I'm not sure what this means. If we posit the opposite, the industry would be attracting those who appreciate its laissez-faire nature. That is to say, those who are cutting corners now would be dominating the intersection. We label corrupt those we cut corners, simply because the regulations exist, but with the lack of said regulations the actions would either be at par (where they are now) or more egregious -- albeit without the unappreciated label.


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I think that most people would believe so. Like you said, an establishment that holds a massive amount of money would probably attract shady dealings. But some hopefuls would like to think that is is not often the case.

Terry Bennett

To the original point, "...because that's where the money is..." I would hope that not all priests are pedophiles, but if a person is already a pedophile, the priesthood makes a darned convenient front.

Banking is literally the money business; it is likely to attract people who like dealing with money. The little kid who loved running his hands through piles of coins may well grow up to be a banker. Those people who have already decided their purpose in life is to amass large amounts of wealth are going to look for more effective ways to do it, and sometimes a bank will make a mistake and send a bear to guard the honey.

In earlier times, bankers were different people: conservative, diligent, circumspect, all the qualities they needed to inspire trust from depositors who were counting on them and not the FDIC. (Some still cheated.) Your banker used to know your business as well as you did. Along came the quants, abstracting out the realities of the product and treating all businesses as machines of cash flow - an assumption that can be expected to fail in the moderate-to-long term. The quantative approach is not necessarily a negative development, but the safeguard that would naturally be in place - specifically, customer skepticism - has been negated. Government regulation has had the effect of leading to more corruption rather than less.

There is plenty of unscrupulous behavior to go around. Madoff was a salesman rather than a banker. Enron employees called up the power plant on a hot day and told the managers to fake a problem and shut down to drive the price up. The housing mess rested on cheating by all participants: banks, realtors, and buyers. On the good side, it's just money - not murder or rape. If we'd skin a few unscrupulous actors alive in the public square every now and then, and if people would go into transactions with their eyes open and possessed of a keen understanding that money is something other people may want badly enough to try to acquire it by deception, I expect this type of problem could be adequately controlled.

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Jack

Becker, accidentally? makes the strongest possible case for a tightly regulated FDIC insured banking system, and a much less regulated "investment banking" gambling system with the latter NEVER being bailed out.

"Funny thing" pre-Paulson that Goldman was a 75 year old partnership with its actions guaranteed by all the partner's assets. Today? stockholders and those doing the bailing take the hit.

Jack

J. Agreed! Old style banking was hardly attractive to adventurers and buccaneers.

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