Why there can only be one basket of regulatory eggs

By Felix Salmon
September 1, 2009
Sheila Bair, with her tired and utterly inappropriate metaphor that "we can’t put all our eggs in one basket". To the contrary, we have to put all our regulatory eggs in one basket, because otherwise the phenomenon of regulatory arbitrage will simply result in a race to the least-safe basket, as well as competition between regulators to see who can be most accommodating to banks.

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The prize for the weakest argument ever against a single strong bank regulator goes to Sheila Bair, with her tired and utterly inappropriate metaphor that “we can’t put all our eggs in one basket”. To the contrary, we have to put all our regulatory eggs in one basket, because otherwise the phenomenon of regulatory arbitrage will simply result in a race to the least-safe basket, as well as competition between regulators to see who can be most accommodating to banks.

The most corrosive aspect of the US regulatory infrastructure to date has been the ability of financial institutions to go regulator-shopping: that must be stopped. And the only way to stop it, in a world where AIG can end up being regulated by the Office of Thrift Supervision, is to have just the one regulator.

I was on KCRW this afternoon with economy.com’s Mark Zandi, who said that the financial crisis was a “scarring event, imprinted on our DNA” and that “for at least two generations”, regulators are going to “do the right thing enough times so that we don’t get into another crisis like this”. I don’t buy it. If there’s a choice of regulators, there’s inevitably going to be at least one which lets things fall through the cracks. And that one is going to be the one which ends up in charge of AIG. The only way to prevent that is to have just one regulator.

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