Victoria McGrane at WSJ reports on a paper by Columbia University’s Charles Calomiris, presented at the Atlanta Fed’s 2013 Financial Markets Conference.
In populist democracies, such as the United States, the regulation of banking is used as a political tool to favor some parties over others. It is not that the dominant political coalition in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate instability as the price for obtaining the benefits that it extracts from controlling banking regulation………..
Smart economists with their regulatory ideas are sort of dead on arrival. Political coalitions will decide — not whether you’ve got the right VAR model — [but] whether a banking system is going to be set up with rules that will lead it to be stable and have abundant credit or not.
Charles Calomiris has absolutely nailed it: Populist democracies are prone to financial instability. If you want a stable financial system, you first need to overhaul the political system.