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Political Economy

G15 - The Failure of Financial Regulation: Why A Major Crisis Could Happen Again

Date: Jun 6 | Time: 08:45am to 10:15am | Location: SWING 210

Chair/Président/Présidente : Anil Hira (Simon Fraser University)

Discussant/Commentateur/Commentatrice : Timothy Shaw (University of Massachusetts - Boston)

Session Abstract: Based on a forthcoming edited volume of the same name (PalgraveMacmillan 2019), this panel examines the long-term, underappreciated breakdowns in financial regulation that fed into the 2008 global financial crash. Most of the literature focuses on short-term factors such as the housing bubble, low interest rates, the breakdown of credit rating services, and the emergence of new financial instruments. There is also a large literature of “tell all” books by insiders such as Henry Paulson. The reforms instigated by the crisis, such as Dodd-Frank legislation in the US and new liquidity requirements in the EU, reflect such short-term perspectives. Our contention is that the focus on the immediate crisis and the reforms in its wake miss larger trends in finance that preceded and continue after the crisis itself. Furthermore, stagnant regulatory approaches miss technological innovation in finance, from globalization to bitcoin. We demonstrate that financial regulation suffers from long-standing unaddressed fundamental weaknesses. We focus on regulatory capture, moral hazard, the reflexive challenges of regulatory intervention, and emerging issues as illustrated through offshore finance and remittances.

The Effects of Regulatory Capture on Banking Regulations: A Level-of-Analysis Approach: Theodore Cohn (Simon Fraser University)
Abstract: This chapter assesses the validity of a hypothesis associated with regulatory capture theory – that capture resulted in banking deregulation which was a major factor contributing to the 2008 financial crisis. Capture occurs when regulators and politicians consistently give preference to regulated banking interests over the public interest. Whereas most research focuses on capture at the national and global levels, this chapter fills a gap in the literature by also focusing on the individual level. Looking at all three levels provides a better assessment of the evidence for capture, and the conditions under which it occurs. The chapter finds compelling evidence that capture had, and continues to have, a major effect on banking deregulatory decisions. The conclusion also includes recommendations for limiting regulatory capture in banking. Keywords: financial regulation, regulatory capture, cognitive, material, and cultural capture, banking system, Federal Reserve, Alan Greenspan, Basel Accords

Financial Regulation and Monetary Policy: The Spectre of Government Failure: Laurent Dobuzinskis (Simon Fraser University)
Abstract: This chapter provides a supportive account of the hypothesis advanced by “Austrian economists” that the crisis was the outcome of “malinvestment,” i.e., overinvestment in the housing sector in response to ill-considered regulatory measures adopted by the US government. In other words, it was less a case of a “market failure” than a “government failure.” Not only a lack of regulation but also mis-regulation can distort markets. The problem stems from the “knowledge problem” first analyzed by F.A. Hayek: policy-makers often fail to estimate the complexity of the market processes they attempt to control. However, appearing to ignore a problem, for example by allowing TBTF entities to fail, is politically unfeasible. Hence the cycle of conflicting policy goals and contested regulatory reforms that continue to produce uncertainty in the Western world. This chapter concludes by underlining the risks involved in paying too little attention to the complexities inherent in financial markets. Keywords: financial regulation, complexity, government failure, Austrian school, Friedrich Hayek, Keynesian economics, theory of the second best

Remittances, Regulation, and Financial Development in sub-Saharan Africa: James Busumtwi-Sam (Simon Fraser University)
Abstract: This chapter critically examines the financial regulations needed to leverage remittances into positive sustainable development outcomes in sub-Saharan Africa. Although remittances have been the fastest growing, most stable, resilient and reliable source of private capital flows to the region since the 2008 financial crisis, regulations have not kept pace with their increased importance. Noting the context-dependent nature of the remittance-development relationship, the chapter focuses on financial development as a key context. Leveraging remittances into positive development outcomes requires a financial regulatory system that enhances complementarities along the remittance transfer chain. Regulations are needed to expand market access and competition, reduce financial exclusion, facilitate technological innovations in financial services, reduce high transaction costs and informal transfers, enhance accuracy in remittance reporting, and curb illicit financial flows. Keywords: remittances, financial regulation, financial development, sub-Saharan Africa, diaspora, migration, sutainable development, technology, private capital flows

Regulatory Mayhem in Offshore Finance: What the Panama Papers Reveal: Anil Hira (Simon Fraser University)
Abstract: This chapter discusses the worrying increase in offshore financial flows resulting in tax evasion in the global economy. We demonstrate that offshore financial tax evasion is nothing new; it has been tolerated for decades, and its increasing scope portends a role in future crashes. The Panama and Paradise Papers reveal how individuals, multinational firms, terrorists, and criminals increasingly use offshore financial centres to hide wealth and evade taxes. While the various government and international entities have devoted considerable attention to the issue, reform efforts fail to address the fundamental drivers of offshore finance: a lack of transparency, information sharing, and tax competition. The failure of governments to work together has important implications, including creating a disproportionate burden on individual taxpayers, exacerbating inequality, raising questions of fairness, constraints on fiscal policy, and increasing resort to debt by governments. Our suggestions for reform focus on ways towards consensus, transparency, coordination, and enforcement in global financial regulation around taxation.