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‘The Bailout Trap’



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The Legatum Institute’s Dalibor Rohac has a bracing piece in the Wall Street Journal Europe edition on how Europe is going wrong in its approach to the financial industry. As Rohac writes:

The European Union’s Internal Market Commissioner Michel Barnier … seems to believe that another meltdown could be avoided by regulating the minute details of how banks are run, how their executives are remunerated, and how public-spirited they are.

But . . .

No matter how much regulators will try to tweak corporate bonuses and capital adequacy rules, excess leverage and risk-taking will remain an issue as long as banks know that taxpayers will bail them out. 

America has the same problem — and its politicians and regulators afflict themselves with the same distractions. 

One of Commissioner Barnier’s potential fixes for finance, for example, is to use his leverage over banks to get more ladies in the boardroom, as some studies purportedly show that women can assess risk better than men can. 

Women are rational creatures, though. So this “fix” won’t help, because, as Rohac notes, “In a situation in which the government protects the banks from failure, even the most cautious executives would consider it rational to make risky decisions — no matter their gender.”

Rohac and a co-author, Matthew Sinclair of The TaxPayers’ Alliance (Britain), have some more detailed research on what’s going right and wrong — mostly wrong — with global financial regulation here



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