It’s easy to take potshots at the Paulson plan, and I haven’t resisted doing that, especially its embrace of new regulations, but is there anything to like about it?
Sure. It’s nice to see an attempt to harmonize a system of complex, overlapping regulations that numb the mind, make lawyers rich, and stall innovation and competition. As Paulson concedes, parts of the regulatory superstructure for the U.S. banking system have been around since the 1860s, and modernization is overdue.
Faint praise? Admittedly. But I generally struggle with the justification for most banking regulations. Yes, the taxpayer is on the hook because a) the Fed is the lender of last resort, and b) we have deposit insurance, so we need to have a governmental presence. But that is circular, in that it begs the question of why we have a governmental presence in the first place. What is it that’s so darn special about banking that we’re willing to bear the price of bank bailouts, regulations, etc., just to make sure we don’t have a repeat of bank runs?
It sometimes seems like we regulate banks because this cosseted industry surrounded by governmental safety nets attracts and employs too many nitwits who require us to keep an eye on them.