The Wall Street Journal has published a disingenuous editorial that claims that it is we should not worry about anti-regulatory leaders who produce a self-fulfilling prophecy of regulatory failure because they are chosen on the basis of their ideological opposition to effective regulation. The WSJ’s position is that George Stigler supposedly proved that “regulatory capture” is “inevitab[le]” and that any need for financial regulation and supervision can be supplied by “simple laws that can’t be gamed” such as a 15% capital requirement.
“Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can’t be gamed by the biggest firms and their captive bureaucrats. This means repealing most of Dodd-Frank and the so-called Basel rules and replacing them with a simple requirement for more bank capital—an equity-to-asset ratio of perhaps 15%. It means bringing back bankruptcy for giant firms instead of resolution at the discretion of political appointees. And it means considering economist Charles Calomiris’s plan to automatically convert a portion of a bank’s debt into equity if the bank’s market value falls below a healthy level.”
No person did more to try to make financial regulation ineffective than did George Stigler, though Peter Wallison, Alan Greenspan, and Charles Calomiris were all in the running for that title. No media organ tries so hard to destroy effective financial regulation as the WSJ. Calomiris also ran his bank into the ground and was denounced by his brother as incompetent, so the suggestion that we take advice from him is a fine example of unintentional self-parody.