Free Traders Want Banks to Take Their Risky Activities Overseas

According to the NYT, when the Senate Banking Committee heard testimony by Paul Volcker on his proposal to restrict proprietary trading by commercial banks, Senator Bob Corker expressed concern that the restrictions would cause banks to move overseas. It appears as though Mr. Corker implied that this would be a bad thing. In fact, if banks who want to engage in risky behavior move their operations overseas we should view this as a positive. The explicit and implicit support that governments give to their banks is a form of subsidy. The subsidy is larger if the banks are allowed to take excessive risks. If other countries allow their banks to take bigger risks than would be allowed in the United States, then people and businesses in the United States can take advantage of their more lax regulation. If things turn out badly, then these other countries will end up picking up the tab for their banks, just as did Iceland. This is an argument for effective regulation in the United States, not an argument against it. The NYT should have noted Mr. Corker's apparent confusion on this issue.

--Dean Baker