And another thing...

I want to continue my rant on the New York Times' recent article about how the subprime mess has led some in the "international community" to call for more input into US financial regulation. (See my screed here and the NYT article here.)

Clearly, greater international regulatory cooperation can be a great boon. However, the arguments posited by Peter Bofinger and Professor Dick Bryan in Heather Timmons' and Katrin Bennhold's article are not among the reasons we need this cooperation. International regulatory cooperation exists for two purposes -- so bad guys can't use the international system to undermine national sovereignty (quite the opposite of what Bofinger is suggesting) by permitting regulatory arbitrage; and, second, so the world's regulators don't step on each others' feet so much, to the detriment of global markets.

I'm harping on this point because these academicians really should know better. For example, the article notes:

Their argument is simple: The United States is exporting financial products, but
losses to investors in other countries suggest that American regulators are not properly monitoring the products or alerting investors to the risks. “We need an international approach, and the United States needs to be part of it,” said
Peter Bofinger, a member of the German government’s economics advisory board and a professor at the University of Würzburg.

While regulators in the United States have not been receptive to the idea in the past, analysts said that Europe and Asia had more leverage now. Washington might have to yield if it wants to succeed in imposing bilateral regulations on government-owned investment funds from emerging economies.

“America depends on the rest of the world to finance its debt,” Mr. Bofinger said. “If our institutions stopped buying their financial products, it would hurt.”

Rather than an argument that the US regulators are asleep on the job, isn't this an argument that the European regulators aren't monitoring the risk management practices of their own firms? Were these firms really snookered into believing that the subprime mortgage securities were safer than they are -- particularly when anyone with half a bucket of sense could tell you otherwise?

Likewise, it is certainly true that US regulators have not been keen on engaging foreign governments in determining what US financial regulations should be. Indeed, I suspect that if the US public knew anyone in the United States was even considering it, they would be hanged from the nearest lamp post (which may explain why Basel II is as complicated as it is -- US banking regulators, after all, have such skinny necks). All of that said, I fail to see why US financial regulators would particularly care if foreign investors, in particular, stopped investing in any specific US security. Regulators might care if investors, writ large, started having a problem, but there is nothing magical about foreign investors.

And this, fundamentally, is why these academics' arguments fail. The Fed, the SEC and most other US financial regulators draw no distinctions between US and foreign investors. This is the strength of the US system and why the United States is able to import capital so cheaply, regardless of how many boneheaded statements Congressional leaders might make about foreign capital. What's good for foreign investors is good for American investors, and vice versa. US regulators are unlikely to take advice from foreign regulators who historically have a problem with attracting even domestic investors to their own market.

EU wants everyone to do things its way

An amusing article from the FT (EU wants rest of world to adopt its rules). A European Commission paper soon to be released says the European Union should promote “European standards internationally through international organisation and bilateral agreements.” Doing so will give an advantage to European companies since it “works to the advantage of those already geared up to meet these standards”.

Yeah, good luck with that. A word to the wise: if you're trying to slip one over on someone, it's best not to announce that this is what you're trying to do.

The FT adds that the sheer size and wealth of the Union’s single market means that few corporations can afford to ignore it. “By harmonising the rules for a market boasting 500m consumers, the Union has set standards 'which partners then have to meet if they are to benefit from the single market'.”

Except, of course, that the rules for the EU really haven't been harmonized for 500 million consumers. Actual implementation of EU directives varies widely among the different EU countries, and where real harmonization would be too painful, EU directives are nebulous to the point of pointlessness. In other places (such as labor and environmental laws), EU standards place EU member states at a competitive disadvantage vis-a-vis their American, Chinese and Japanese competitors.

Sure, the EU is too big to ignore. But it's not big enough to truly set global standards, and as the size of its economy shrinks relative to the US, China, India and elsewhere, it will eventually be ignorable. That's why its more important to get the standards right, than to try to convince everyone else to go along with them.