John Cochrane’s Bank Reform

He proposes,

For every dollar of short-term debt, pay the government (say) 10 cents. I don’t know the exact number either, but a wrong tax rate does a lot less damage than a wrong quanti[t]ative restriction.

Instead of telling banks what their ratio of debt to equity should be, let them choose that ratio, based on a tax that offsets the implicit subsidy to debt that comes from bailouts. Makes sense.

A Modern American Scandal

Found by a CBS affiliate in New York.

Clandestine dinner parties like the one Leitner attended have become more common in New York City. And insiders told Leitner they are completely unregulated…

The Health Department refused to discuss the issue on camera but in a statement told CBS 2: “In New York City, people who offer meals to the public for money are considered food service establishments and need permits. The city does not allow meals to be served to members of the public in someone’s home.”

After I wrote this, but before I posted it, Art Carden gave it appropriate treatment.

Macro-prudential = Micro Management

So says John Cochrane.

This is not traditional regulation—stable, predictable rules that financial institutions live by to reduce the chance and severity of financial crises. It is active, discretionary micromanagement of the whole financial system. A firm’s managers may follow all the rules but still be told how to conduct their business, whenever the Fed thinks the firm’s customers are contributing to booms or busts the Fed disapproves of.

Echoing what I wrote.

Politicians want to make credit allocation decisions. Whatever its nominal purpose, bank regulation is used to enable politicians to undertake credit allocation.

Property Without Rights

Nick Sibilla writes,

Airbnb rentals in Paris contributed $240 million in a year to the local economy, while Crain’s estimates they could have an economic impact worth $1 billion in New York State. Plus, the property owners can earn some income on the side. It’s a win-win-win…except for the established hotels.

For some reason, the laws against renting out your own property strike me as a more fundamental violation of property rights than other regulations.

Of course, when it comes to making me angry at government regulation, shutting down cheap bus service is also right up there.

Stories like these are what make a phrase like “Government is the name for the things we do together” ring so hollow in my ears.

Richard Green Disses Car Dealers

He writes,

The Wall Street Journal has a good story today about how car dealerships are (successfully) lobbying legislatures to ban Tesla Motors from marketing their cars directly to consumers. GOP legislators, who get the willies about regulation that actually solves real problems, are on board with supporting protectionist policies for auto dealerships.

In economics textbook, government acts to correct market failures. I am tempted to say that, in the real world, government acts to create market failures.

I wish that the car-dealer case were an unusual exception. But basic public choice theory (which ought to be in more economics textbooks) suggests that concentrated interests win and broader interests, including correcting market failures, lose.

I was tempted to title this post, “Richard Green shoots at Republicans, hits mainstream economics,” but that would have been uncharitable.

Kling’s Law of Bank Capital Regulation

Thomas L. Hogan, Neil Meredith, and Xuhao Pan write,

we find that the standard capital ratio is significantly better than the RBC ratio as an indicator of bank risk and performance and that using both ratios simultaneously does not produce better results. Taken in conjunction with the other available evidence, our findings indicate that RBC regulations lead to more risk-taking by individual banks, and more overall risk in the banking system, without improving the effectiveness of the Fed’s capital regulations.

RBC = risk-based capital. Kling’s law is that the capital measure used by regulators will, over time, come to be outperformed by a measure that the regulators are not using. So, if you are using standard capital, risk-based capital measures will better predict bank risk, and conversely.

The reason can be found in my essay, The Chess Game of Financial Regulation.

Regulatory systems break down because the financial sector is dynamic. Financial institutions seek to maximize returns on investment, subject to regulatory constraints. As time goes on, they develop techniques and innovations that produce greater returns but which can also undermine the intent of the regulations.

Cass Sunstein’s New Book

It’s called Simple, or perhaps Simpler (the letter r appears with a cross-out). Tyler Cowen says that Sunstein is always worth reading. In this case, I am unable to agree. The book is a retrospective on Sunstein’s time in the Obama Administration as “regulatory czar.” Its message is that he and his colleagues did everything right, and their critics either did not understand or were dogmatically partisan. On p. 5, he writes,

To resolve disputes about the likely effect of rules, economists are essential.

Two pages later, he writes,

Insisting on careful analysis of costs and benefits, we issued historic rules to increase the fuel economy of cars and trucks…

I think it is fair to say that many economic studies question the value of fuel economy standards. I am not saying that fuel economy standards are utterly refuted by economic analysis, but I would have liked to see a serious discussion of the literature on fuel economy standards, or at least a mention of the fact that they are controversial with economists.

I do not disagree with his view that regulation ought to employ economically sound principles. However, I do not think he has made a persuasive case that the Obama Administration made significant strides in that direction.

[UPDATE: Sam Batkins and Ike Brannon write,

Currently, when an executive agency proposes an “economically significant” regulation (meaning that its estimated effect on the economy would be $100 million or greater), it must submit a regulatory impact analysis (RIA) to OIRA for review. The current administration’s OIRA has returned for reconsideration precisely one regulation in its first four years, which suggests a lack of interest in regulatory oversight

]

A Housing Discrimination Rule

From HUD.

the charging party or plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. If the charging party or plaintiff proves a prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. If the respondent or defendant satisfies this burden, then the charging party or plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.

So, suppose that a lender uses a credit-scoring algorithm produces scores below the approval cutoff for blacks more often than whites (step one). Then, the lender shows that the credit scoring algorithm predicts default probabilities accurately for both blacks and whites. Does that satisfy step two? And then what sort of can of worms is opened by step 3? Suppose a community-action group claims that “If you pay us to set up a lending diversity program, we can bring you minority loans with acceptably low default rates,” does it have to prove its claim? If so, then this is actually harder on community-action groups than the current situation, in which all they have to do is threaten to sue and a bank will pay them protection money to make them go away.

I am only sort-of kidding. I would put the burden of proof to HUD to show that in recent years there has not been a lot more suffering caused by anti-discrimination regulations than by actual discrimination. And I am talking about suffering by people with “a protected characteristic.”