St. Patty’s Day is neigh, but there’s more to learn from our Irish brethren than how to swill green beer and appreciate boiled cabbage. Paul Krugman offers an interesting analysis looking at both Ireland, whose financial system melted down like our did, and Canada, who was fairly unscathed by the recent economic disaster which befell much of the world.
While there are several lessons to be learned, the major common thread seems to be effective regulation. Ireland, like the USA lacked enforced constraints on its financial markets while Canada kept their bankers contained. Interestingly, the effective legislation is pretty similar to the regulation the US had from the Great Depression up until Reagan started taking it apart. Note that this was also a time of financial stability, where post-Reagan decades have seen much more volatility from the financial sector (e.g. the S&L Meltdown), culminating in the recent near-depression.
The lessons of history and of other countries seem very clear. Our financial prosperity depends in no small part of stability of our financial markets. And that stability is achieved through good regulation. Sure, this means that bankers and investors won’t have the opportunity to get obscenely rich. But it also means your 401K won’t bounce around in value so much and we won’t be saddled with bailing out failed banks at taxpayer expense. Seems like a fair trade to me.
And no, this is not “Socialism.” That would be where the government owns the bank. Ironically, TARP brought us closer to socialist banking, or would have had we put any intelligent constraints on the money we gave away. It is simply intelligent capitalism.
Note that the government plays this role in many markets where the market is of vital interest to nearly everyone. The power industry, the food industry, and the telecom industry are regulated precisely because losing them would be an untenable burden on the country. Banks and health insurance companies are no different.
We ignore these lessons at out own peril. Many on both sides of the aisle pine for the good old days. The days when growth and prosperity seemed endless. Those were also the days when financial institutions were regulated for the safety of us all.