Readers may have noticed today’s WSJ article on a set of studies suggesting that the relationship between capital levels and the costs of loans is less significant than the banking industry contends. (Naturally, the Journal provides no links. I’m assuming the article is referring to this study by Kashyap, Stein, and Hanson and this one by Douglas J. Elliott. Readers should feel free to correct me on that in the comments if I’m wrong).
But you may not have noticed today’s excellent limerick from Limericks Économiques (poems on the dismal science of economics by Dr. Goose):
Overheard in a Bank Lobbyist’s Office
“We argued, when banks appeared strong,
That more capital was needless and wrong,
But we changed this impression
In the current recession,
Which more capital, we claimed, would prolong.”
Both remind me of Lawrence’s recent post on the real cost of financial reform, in which he argued, “Decrying the ‘costs’ of reform is the canard of industry free loaders.”
Sometimes, of course, the costs of regulation are likely to outweigh any benefits, particularly when they reflect an attempt by lawmakers to balance the competing interests of powerful, organized interest groups and public outrage over a recent, salient event. In such a case, the likely result is cosmetic reform that increases compliance and other costs, without meaningfully addressing the underlying problems giving rise to reform in the first place. (See my recent post, dodd-frank: I’ll have the meatless entrée, please, for more on this).
But Lawrence is correct that not every industry complaint about the likely costs of financial reform are to be taken at face value. Boys sometimes cry wolf, and financial partygoers sometimes want the music to keep on playing.
