Woulda coulda shoulda

by Russ Roberts on July 16, 2010

in Financial Markets, Gambling with Other's $, Uncategorized

Mark Thoma writes:

A big problem when the financial crisis hit was that regulators did not have the authority to force financial institutions in the shadow banking system into the type of resolution process the FDIC uses for banks in the traditional banking system. This solves that problem, and this is an important change.

Arnold Kling writes:

On the most important issue of “too big to fail,” the legislation does exactly the wrong thing. It gives regulators discretion to use resolution authority to break up at-risk institutions. But the regulators already had that. What they need are hard and fast rules that require them to use resolution authority under well-specified conditions. On a case-by-case basis, it is always is safer to do a bailout, just as on a case-by-case basis it always seems easier to just pay ransom to the kidnapper. Resolution authority that is discretionary is resolution authority that will never be used. And the big banks know it.

They both can’t be right. When I read Thoma I think of the Shel Silverstein poem,Woulda-Coulda-Shoulda:

All the woulda-coulda-shouldas
Layin’ in the sun,
Talkin’ ‘bout the things
They woulda-coulda-shouldas done …
But those woulda-coulda-shouldas
All ran away and hid
From one little did.

One little did is one more than we ever seem to have. They coulda let Bear Stearns’s creditors or AIG’s or LTCM’s or Mexico’s or Continental Illinois’s lose some, just some of their money. They shoulda. And they woulda if it had been safe. Or so they claimed. But it was too risky.They–the regulators and politicians didn’t give all that money to creditors because the creditors were politically powerful. No. The politicians and regulators did it for the country. At least that’s what they told us. They just couldn’t let lenders pay a price, even a very small one, for making imprudent loans if the lenders were large. I doubt the regulators will see their way to doing it differently the next time either. They could, of course. They just won’t.

To be fair to Thoma, he thinks the problem is also about “Too big” alongside “To fail” and he’s disappointed the legislation doesn’t reduce the size of banks. If banks were smaller as Thoma wants, maybe the discretion available to regulators would be less important. But I still think he confuses coulda with will.

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