Daily Archives: May 21, 2010

Senate approval of the financial reform bill is a good thing. I disagree with those who argue that it was more important to keep debating the measure and improving it than to get the thing through. What makes anybody think that further debate would have improved it rather than made it worse? And continued inaction is unsettling. There was a lot to be said for prompt resolution (as it were). In any case, the bill was always going to leave lots of discretion to the regulators in framing how the new rules will actually work. It was best to activate the new job assignments quickly, so we will find out what the new rules will be. Even though the bill has passed, for instance, I still don’t know whether the Senate measure calls for a Volcker rule. It depends what you mean by a Volcker rule. Even if the Senate language survives, it depends what the Fed and the others subsequently make of it.

One thing I would have traded further delay for would have been simplification of the regulatory structure. The House and Senate bills — which are a lot alike, fortunately — both  leave the system at least as complicated as it is at the moment. That was a big part of the problem before the crisis, and if anything it has been made worse. (The council of regulators is a weak solution.) But simplification never seemed to be on the agenda at any stage. That is a shame, and something the architects will come to regret.

Howard Davies and David Green had an interesting column in yesterday’s FT. It concentrated on the debate in the UK, but what they say has wider application. They caution that no structure of regulatory responsibilities fared particularly well in the crisis. But they also note, among other things, an important advantage of integrated policy, and the need, in effect, to give central banks a second instrument –  macroprudential regulation — in addition to interest rates.

But the impact of ratcheting up capital requirements is most likely to be felt in the form of an increase in the cost of credit. Banks will seek to pass on the increased cost of lending to customers, which will in turn restrain credit demand… The impact may not be precisely the same as increasing the short-term interest rate, but if capital requirements are raised across the board, it will be close. So does it make sense for there to be a separate financial policy committee, as seems to be envisaged, to manage macroprudential policy? Surely the decision should be considered alongside interest rate policy, which is a matter for the monetary policy committee. Regarding the two instruments as separate, aiming at two different policy outcomes, looks wrong.

Good point. Something for the US council of financial regulators, once it starts work, to bear in mind.

These days the editor in me is usually well suppressed, but can still be provoked. “Inflation Rose in April at Lowest Rate Since the 60s,” said a headline in the New York Times yesterday. I scratched my head. The first paragraph said it again. How could this be?

Inflation fell in April on both of the usual measures. It did not “rise at its lowest rate since the 60s”. Consumer-price inflation was 2.2% in the year to April, down from 2.3% in March. Core inflation, which excludes prices of food and energy, was 0.9% in the year to April — the lowest since 1966 — down from 1.1% in March.  Core prices rose at their lowest rate since the 60s. But what’s a first derivative among friends?

Another thing. Why (oh why) was I made to read nine paragraphs, including one quotation telling me that the trend was soft and another that it was benign, before I actually got to the 12-month CPI figure? And if all this wasn’t annoying enough, look what happened to the markets.

The WSJ headline said: “Inflation at 44-Year Low”. Good. Thank you. Especially for not saying, “Inflation Rises to 44-year Low” — an easy mistake to make.

The remarkable thing about the European Union is how far this project has come without its partners ever deciding what it was for — or, more precisely, where it would stop. The crisis now facing the EU demands answers to those questions. But this is not the first time that circumstances have demanded such answers. The European way is not to provide them, which would be hard, but to keep on muddling through.

It has always worked before. As I say, the Union has come this far, and it has been a stunning achievement. Governments will doubtless try the same approach once more. This time, though, I wonder if they will finally hit the wall.

For reasons I explain in this column for National Journal, I think they will.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

Clive Crook’s blog: A guide

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