President Obama’s renewed call for bank regulation, like much of his agenda, has proven popular but polarizing. More importantly, however, it highlights the constraints that globalization has placed on even the most powerful states in the world.
In this particular instance, the Obama Administration has called for special taxes and regulations that would serve to effectively limit the size of banks and discourage undue risk taking. This policy is certainly designed to assuage populist anger over the bank bailouts but would also reduce the risk of moral hazard in the banking sector by pushing risk off of the U.S. Treasury’s balance sheet and back onto the banks’ balance sheets. Any economist would insist after all that this is where it rightfully belongs. Unfortunately, it’s not quite that simple.
As Congressman Barney Frank and a great many others have pointed out, we can’t get out too far ahead of other nations on banking regulation lest we handicap American banks from competing against their foreign rivals. Simply put, onerous taxation or structural limits on the size and activity of American banks would not apply to foreign banks and would place American banks at a competitive disadvantage.
To an increasing degree, legislating effectively in today’s globalized world requires extensive cross-border policy coordination. At the same time, we cannot allow the interconnectedness of global markets and networks to reduce all matters of policy to the lowest common denominator. In the 21st century, America must rally those who will follow to make global markets safe and isolate those who will not. It’s the only way to preserve a level playing field without ceding sovereignty.
We failed to do this in the 20th century and were rewarded with a persistent off-shore banking problem that facilitated organized crime, tax evasion, and political violence. The penalties for these types of policy coordination failures are far more severe today. The “Cayman Islands model” of competitive advantage must become a relic of the past.
