Fluctuations in Banking Regulations

Throughout the economic history of the United States, government regulation has declined during times of prosperity and increased in times of national crisis. During periods of economic prosperity, banking regulation receives little to no attention as the focus is placed instead upon securing individual prosperity. In an article concerning trends in banking regulation, David Leonhart discusses the repercussions of fluctuating bank regulations. He writes the following:

By definition, the next period of financial excess will appear to have recent history on its side. Asset prices will have been rising, and whatever new financial instrument that comes along will look as if it is safe. "When things are going well," Paul A. Volcker, the former Fed chairman, says, "it's very hard to conduct a disciplined regulation, because everyone's against you." Sure enough, both Bernanke and Geithner, along with dozens of other regulators, overlooked many signs of excess over the past decade.

The article strives to convey the importance of keeping banking regulation a priority in both times of prosperity and crisis. It is necessary that a perpetual state of regulation be enacted to protect individuals from fiscal losses incurred by corporate misjudgment. Additionally, the U.S. government will be saved the costs of repairing financial meltdowns if a standard yet flexible bank regulation be put in place.

The argument for increased banking regulation is supported by the comments of Arnold King regarding Leonhart’s article. King writes about the essentiality of time consistency in banking regulations. Simply because times are good, King points out, does not justify lax regulations. Rather, the solution lies in “making credible commitments not to bail out failed banks” and “that you need to make credible commitments to keep rules in place when times are good”. In employing these precautions and standards, a commitment to today’s regulatory regime will remain intact.

For further reference and to view the article, please visit the Library of Economics and Liberty website at:

(http://econlog.econlib.org/archives/2010/03/time_consistenc_1.html)