My entry at the Free Exchange Raghuram Rajan roundtable on Counter-cyclical regulation:
Seize the Moment, by Mark Thoma: I've also worried about the regulatory cycles discussed by Raghuram Rajan, but I don't see the problem in quite the same way. How you should view the regulatory cycles he describes depends upon your view of the average level of regulation at the centre of these cycles. Rajan appears to take the view that the regulatory oscillations are centered on the correct level of regulation, leaving us with too much regulation just after the reactionary bad times, and too little regulation during the good times when regulation tends to be eased either implicitly, by the market, or explicitly by regulators.
Rajan's piece has recommendations for ways to offset the regulatory cycles, but if the average level of regulation over the entire cycle is too high or too low, the recommendations would differ, or at least require augmentation. Suppose, for example, that the level of regulation is too low on average, a view I have much sympathy with. ... [...continue reading...]