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Are We All Reaganites Now?

Tuesday, 21 Jun 2011 | 4:34 PM ET

The fight over capital requirements for the banking sector is bringing together a strange set of bedfellows.

On the one hand, we’ve got liberal critics of banks like New York Times op-ed columnist Joe Nocera and economist Simon Johnson arguing that big banks need more capital. On the other hand, we’ve got the conservative Wall Street Journal editorial board arguing exactly the same thing.

One of the most interesting bits of convergence between these views is the rejection of the idea that the US should hold back on requiring more capital for reasons of international competitiveness.

Here’s the Journal’s editorial:

U.S. bankers reply that the rest of the world will cheat and the French and German banks will appear to comply with Basel while running higher risks than U.S. competitors. No doubt that's true. And no one should expect the Europeans to follow us on the path to 14% or even 10% capital ratios.

But that should be a problem for their taxpayers, not ours.

Here’s Nocera:

And because the Basel standards, whatever their final form, must still be enacted and enforced by individual country regulators, there is no guarantee that every country will agree to them.

But the U.S. should, no matter what other countries do. Banks always want capital requirements to be as low as possible, because the less capital they have, the more risk they can take and thus the more money they can make (and the bigger the executives’ bonuses). But so what?

Trading some bank profits for a safer financial system is a deal most Americans would take in a heartbeat.

In articulating this “go it alone” position, both Nocera and the Journal’s edit board are adopting a view that harkens back to the economic policies of Ronald Reagan’s first administration. The Reagan team broke with previous administrations over the value of international policy coordination. In their view the proper thing to do was to create the healthiest national economy—which would serve as a beacon or role model for the rest of the world.

Formally, this was called the policy of “convergence”—since it was expected that other leading economies would converge around the successful American economic strategy.

Could that work in banking? It certainly can. If the US is able to build the healthiest financial sector in the world, certainly other countries will want to imitate it. If some prefer to redistribute the risks to their own taxpayers, and their taxpayers are willing to bear this cost, so much the worse for them.

All this emphasis on international coordination of policy is unnecessary. And it’s good to see so many disparate voices once again adopting the Reaganite stance of hanging out a beacon to the world.

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