• FinReg Both/And

    (Did I say I wasn’t going to blog much on FinReg? That just shows you what I know about the topic.)

    Anyway, regulate and break up big banks is not an either/or situation. It’s both/and. So says James Kwak in a post in response to Krugman. I’m happy to agree, but what I think so doesn’t matter. Here’s Kwak:

    We’ve written several times about why smarter/better regulations alone are not enough, but I think the most basic point is simply that regulation always fails — companies always find a way around it — and the costs of failure will be lower in a world with smaller banks than in a world with bigger banks. Yes, it is possible that several smaller banks could act in a way that is highly correlated and essentially mimic one larger bank; but it is not a foregone conclusion that this would happen, among other reasons because the more actors you have, the more likely they are to take differing positions on the market. …

    So I actually don’t think there’s much of a debate here. Or, more precisely, there is a debate about whether to have size and scope constraints, but you don’t have to pick between size and scope constraints on the one hand and closer prudential regulation and resolution authority on the other hand.

    This doesn’t seem to be as difficult an intellectual lift as health reform. Or is it that I’m just missing the confusing details?

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