Crandall & Winston on Financial Regulation

Lynne Kiesling

My thanks to Arnold Kling for the link to this October Forbes article from Robert Crandall and Clifford Winston remarking on financial regulation. They point out, correctly, that the re-examination and soul searching about macroeconomics in which we are currently engaged overlooks the great insights and policy successes that microeconomics-based deregulation have brought to the U.S. economy:

Nothing in the last two years has undermined microeconomic analyses that influenced the deregulation of the airline, trucking, railroad, natural gas, crude oil, telecommunications and cable television markets. These deregulatory successes have not been compromised by the market failures that originated in the financial sector and are at the heart of the Krugman lament. But even if Krugman could uncover a theory that integrates irrational exuberance in financial markets with macroeconomic performance, it would hardly guarantee improved performance of government regulators. Nor would it enhance our considerable knowledge of how markets correct after sharp downturns.

I do think that Crandall and Winston overlook the crucial role that government policy had in fomenting “irrational exuberance in financial markets”, and therefore call it more of a “market failure” than I would, but it’s still a good piece and a good reminder of the benefits that economic deregulation has created in several industries over the past three decades. In particular, Randall and Winston point out that markets provide consumers with adaptation opportunities that they can use as their information and knowledge increase — a fancy way of saying that as individuals take actions in sharp downturns (such as saving more and shoring up their balance sheets), information about those adaptations ripple through markets through price signals and other means.

One thought on “Crandall & Winston on Financial Regulation

  1. The problem with the lack of regulation on financials is that unlike airlines and trucking, there is so little feedback available to the consumer. When I look at the trucking business you see a model where low prices are rewarded by more business, so there is a competitive advantage in efficiencies.
    In the financial sector there doesn’t appear to be any reward for efficiency. Instead more and more layers of middle men are brought into transactions to spread out the “risk”.
    When bond rating agencies abdicated their responsibilities and failed to identify this house of cards, there was no penalty paid. The government bailed everyone out through AIG. This seems an excellent argument that the financial industry is uniquely unsuited to deregulation.

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