For every regulatory action, there is a strange and unpredictable reaction.
The United States looks to better oversee consumer lending, and orthodontists warn that the next generation of American teens will have to suffer with crooked choppers because selling braces on the instalment plan will no longer be feasible.
Regulators try to make money market funds safer and in doing so make banks less stable.
Banking gurus try to make banks less risky and the result is a potentially huge crimp in corporate lending at the worst possible time, when the world needs companies to pick up the baton from the governments that have run their leg in the economic growth relay.
The steady stream of unintended consequences falling from the re-regulation of the financial sector would be amusing if it wasn’t such a serious threat to what regulators are trying to do, which is rebuild the global economy in a safer image.
In many cases, the unfortunate side effects of often-worthy initiatives are a consequence of the confluence of a splintered regulatory system, where each agency is looking out for only one risk, and also of a rush to make rules.
The many strange ripple effects argue ever more strenuously for centralized rule-making bodies, or at least forums where rule makers with various purviews can get together and compare notes.
This needs to happen within countries, and globally, and the best forum could well be the Group of 20.
In fact, that’s exactly what’s happening with the fight about the bank tax. The battle, rather than exposing a flawed, divided G20, in fact shows the group is doing what it’s supposed to do, bringing together the top people in the top economies to make sure regulation makes sense on all levels.
Canada, blessed with no political need to attack banks, is focused on the unintended consequences, including the moral hazard of creating a bailout fund. The result is that the government of this country may have successfully killed a bad international idea.
