I was reading this afternoon and came across this interesting idea on financial regulation.
"If Regulation Q, for example, put a ceiling on the rate of interest that savings and loan institutions could pay on their deposit liabilities, the consequence was an incentive to create a new financial instrument, with the look and feel of a deposit account but with different legal status, to which Regulation Q would not apply. Here is the origin of the money market mutual fund. Subsequently, whenever interest rates rose above the ceiling, funds would move from the regulated to the unregulated account, and borrowers and lenders would find one another outside the regulated sector, especially the largest and most sophisticated borrowers and lenders. Experience with this kind of 'disintermediation' as it was called, produced political pressure from the regulated sector for equal treatment, pressure that was amplified by the voice of borrowers who did not have access to the unregulated sector and so were cut off when funds flowed elsewhere. The result was gradual relaxation of Regulation Q, and a similar dynamic led to relaxation of other New Deal-era regulatory strictures, as the acceptance of one financial innovation emboldened the invention of others." [emphasis added] - Perry Mehrling in The New Lombard Street
What I find to be fascinating about this is that the reaction was not for further regulation but the opposite, less regulation. This is a very interesting idea and it seems to promote increased risk-taking in the financial world. It has similar connotations in my mind to easing regulation on Marijuana to decrease the incidence of marijuana violations. But where one has impact on an individual, in the case of marijuana, the other has aggregate effects on risk.
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ReplyDeleteIt is interesting though that things that we know are harmful - cigarettes, tanning, even alcohol - are increasingly being regulated. There are over 31 state which place regulations on tanning for minors and all have 24-hour usage limits. Smoking bans are present in 29 states.
ReplyDeleteSo is regulation or deregulation more effective? One could use the death penalty as an example. Yet opinions exist on each side as to if "regulation" of punishment really does provide any deterrent, even those aside from actual murders.
Cell phone usage is another recent example of increased regulation. 9 states and DC have bans on using an handheld devices while driving. 35 states and DC have bans on texting while driving. And in this transition we've all likely heard that texting is more dangerous than drunk driving. Time will only tell if this regulation is successful and if we'll see a gradual relaxation of regulation in the future.