Hand Banking Regulation Back to the States

The insurance industry is badly regulated, but it is much better regulated than the banking industry.  Consumers have better protections under state regulation.  The states are closer to consumers, and further away from insurers.

In order to change policy in a given state, an insurer would have to develop leverage over legislators, and that is tough, unless you are an in-state insurer.  But at the federal level, there is only one target, and a lot of resources can be deployed, because the payoff will be big.

Beyond that, state regulators are not so smart, and that is a good thing.  That means they will resist sophisticated schemes for solvency and consumer protection on which a sophisticated national regulator would sign off.

It is a lot easier to beat one gorilla than 50 monkeys.  Regulatory capture is a lot harder at the state level, so my recommendation would be to hand banking regulation over to the states.  After that, we can reduce the Fed down to the FOMC and NY Fed, and break their stranglehold on macroeconomics given all that they fund in academia.  End the regional Feds; they don’t do much anyway.

The idea is to get the government out of the lending business, because they aren’t very good at it.

If we would be more radical, end interstate banking.  This is a simple solution to the too big to fail problem.  If JP Morgan becomes 50 banks tomorrow, guess what?  None of those 50 banks would be big enough to cause a systemic crisis.  Same for Citi and Bank of America.  Too big to fail would be solved instantly.

My main point is this: if you don’t want banking regulation corrupted by the banks, then decentralize regulation, making it much harder for banks to aim at a single target.