Thursday, March 5, 2009

AEI Responds to G30 Report

In response to the Group of Thirty (G30) report entitled Financial Reform: A Framework for Financial Stability, the American Enterprise Institute has issued a response, "Regulation Without Reason: The Group of 30 Report," authored by AEI Fellow, Peter J. Wallison.

Wallison's response is highly critical of the G30's approach, and characterizes the G30's report as written "by the dirigiste wing of the Group of Thirty." The central front of Wallison's attack on the G30's report is that the G30 recommends spreading bank-like regulation beyond the banking system, when it is banks already subject to this strict regulatory regime that are most hurt by the financial crisis. He asks: "why regulation should be extended to most of the major players in the financial system when it has been a consistent failure for banks?"

Wallison argues that "the weakness of the banking system -- the most heavily regulated part of the financial system -- is the central an most obvious problem in the current financial crisis." While conceding that some improvements in prudential regulation and supervision may be appropriate, he argues that "regulation is not better than market discipline at preventing the failure of financial institutions and that even in the dire circumstances of the current crisis, systemic risk -- the only justification for extending regulation beyond banks -- has not appeared."

Mr. Wallison's response further argues that "even if regulation had been successful in the past, there are many reasons not to impose it more widely." According to Wallison, these reasons include:

  • Creation of moral hazard and reduction of market discipline.
  • Regulations creates anticompetitive economies of scale.
  • Regulation impairs innovation.
  • Regulation adds costs to consumer products.
  • Safety-and-soundness regulation imposes long-term costs on society.

Allowing that regulation may be necessary in some circumstances, Wallison says it should be a last resort, and spends the remainder of his response discussing whether there is any policy basis for exetending regulation. In summary, his position is that "there is no sound policy reason for the federal government to regulate or protect the safety of any financial institution for which it has not assumed financial responsibility."

The full text of Wallison's response to the G30 report is available at:

Forum News Feed's summary of the Group of Thirty's report, Financial Reform: A Framework for Financial Stability is available at