Our July 9 screed on the “other Keynesian paradigm” argued that over-regulation was killing what Keynes called “animal spirits” in the private economy. We quoted Jamie Dimon’s peroration to Ben Bernanke where Jamie ticked off a gigantic (but still incomplete) list of regulations and reforms raining down on financial firms from all directions. It concluded with this fascinating exchange (emphases mine):
Dimon: “Has anyone bothered to study the cumulative effect of all these things? And do you have a fear like I do that when we will look back and look at them all, they will be the reason it took so long for our banks, our credit, and our businesses – and most importantly, job creation to start going again. Is this holding us back at this point?”
Bernanke: “Has anybody done a comprehensive analysis of the impact on credit? I can’t pretend that anybody really has. You know, it’s just too complicated. We don’t really have the quantitative tools to do that.”
Well, now someone has indeed done a “comprehensive analysis of the impact on credit.” Allen & Overy, a giant international law firm based in London, did an exhaustive analysis of financial regulation in major economies around the world. It concluded that “The regulatory approach governing the financial system lacks coherent design and is disabling the flow of credit necessary to fuel economic growth.” In an interview with Bloomberg Mr. Etay Katz, the partner in charge of the study, rather precisely echoed Dimon:
“We basically are calling for action. Four years down the line after the crisis, we are seeing huge amounts of regulation, thousands and thousands of pages impacting banks in particular but not only banks. What we are failing to see is people stepping back and looking at the cumulative effect of all of this. . . There is a lack of intelligent design in global regulation…….we see a lot of turf wars and incohesion and duplication and uncertainty.… We are seeing a lot of disabling and over-ratcheting up of regulation but not an intelligent design and seeing what the real economy needs at this point in time…..Regulators are entrusted with stability, and they are taking that responsibility to an extreme.” (emphasis mine)
So the good news is that we won’t have another financial crisis for a while and there are plenty of high-paid jobs for lawyers and regulators in Washington, London, and Basel. The bad news is that, because no one is monitoring the “cumulative effect” of the regulatory avalanche, credit flows are weak, global GDP growth is anemic, unemployment remains high, and living standards are declining for the hallowed “middle class” whom regulators claim to be protecting. This problem will get worse because less than half of the regulations in the Dodd Frank bill have actually been spelled out, according to Washington law firm Arnold & Porter. The winners among banks are the too-big-to-fail giants who can afford to hire platoons of lawyers. The losers tend to be “community banks” that lend to small businesses on more of a person-to-person basis. Oops, sorry about that, middle class.
On Wall Street and off, conventional macro economists largely ignore this problem of over-regulation, because, as their fearless leader Ben Bernanke (formerly chairman of the Princeton Economics Department) noted, it cannot be quantified. In Econoland, if it cannot be quantified it does not exist.
Copyright Thomas Doerflinger 2012. All Rights Reserved.
