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Saturday, June 14, 2008

McArdle and Mankiw on Regulation

Megan McArdle asks some good questions in this piece, but I think she too easily dismisses Greg Mankiw's great question. In response to a top Obama economic advisor saying this:

"If you can borrow money from the U.S. taxpayer at a moment of crisis, that is a very sacred insurance policy underwritten by the U.S. taxpayer," said Mr. Goolsbee in an interview last week with Dow Jones Newswires. "We have the right to oversee anyone who is accessing that insurance policy."...

Mankiw asked this:

Here's a question for Austan: Can an investment bank avoid such regulation if it promises never to use the discount window? Or is this insurance-regulation combo a mandate?

McArdle dismisses that great question by saying the bailout isn't to help the bank in question, but "the system" and so no bank can promise not to need a bailout in the future.

But why not? Why can't banks opt out of the Fed's protective cocoon, and then everyone else knows this and acts accordingly? If you don't want to get stuck being the counterparty to a failing bank, then only invest with banks that opt into the new regulated-but-eligible-for-bailout system.

Of course even with this escape hatch, the existence of the new option would be terrible, since the government could sweeten the taxpayer money+oversight mix in order to get banks to sign up. But still, I think banks should be given the option of entering into this new "beneficial" relationship with the government.

If investors are too stupid to decide the best place for their money--i.e. the less regulated versus the more regulated investment banks--then let's drop the farce and have the government direct all savings and investments.

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