The tricky job of regulating bank risk
Reining in the big banks isn’t as simple as it sounds.
Reining in the big banks isn’t as simple as it sounds, said Matthew Yglesias. “Anti-banker populists” love the idea of barring financial institutions from managing customers’ money while wheeling and dealing in speculative financial products. But it’s not “just bank-lobbying wrangling” that makes that hard to do. Look at derivatives, for example. They’ve brought us nothing but woe, right? Well, not exactly: We might like to bar publicly backed retail banks from risking deposits by playing with them, but what about the airlines that use derivatives “to hedge their fuel costs”? If you tried to ban derivatives outright, “you wouldn’t just need to take on the much-loathed banks, but all the airlines in America and the labor unions that represent their workers and possibly also the companies that manufacture the airplanes.” Railing against banks that make risky trades is easy; writing “precise legislative and regulatory language” that teases out the difference between hedging and speculation is not. Maybe that’s why, despite the passage of laws that purport to ring-fence banks’ speculative activities from the ones the federal government backs, “guaranteed banks haven’t stopped engaging in big speculative trades.” We still have work to do.