#White House

Last week, OMB issued another edict redesigning the way most of the federal government writes rules, going beyond its earlier directive to consider competitive impact now also to demand detailed consideration of the broader public good, especially when it comes to economic equality.  I focused on public-good regulation in last week’s memo because it is sadly alien to federal financial regulation even though, as OMB says, “the benefits and costs of a regulation are ultimately experienced by people.”  I grant that economists are people, but some are also people who don’t like people, at least when qualitative assessment of what people need challenges the quantitative conclusions they cherish.  Pending banking rules thus ignore the public good in favor of complex market constructs, rationalizing them on assertions that, whatever else befalls finance, crises are less likely.  This is a methodology fraught with perverse consequences, the most important of which is that the agencies’ standards will hike the risk of financial crises precisely because they omit distributional analysis.

A demand for distributional consideration is not – repeat not – a plea for the banking agencies to go easy on banks.  It’s a plea for them to be as sure as they can that none but banks that need to be reined in are throttled.  As OMB now also says, “some alternatives may change distributional effects even without significantly changing stringency.”  The extent to which this is the case with bank standards is unknown because not one regulator has ever asked a distributional …