Financial+Regulation+and+the+Current+Crisis-White-2009

Financial+Regulation+and+the+Current+Crisis-White-2009 -...

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1 Financial Regulation and the Current Crisis: A Guide for the Antitrust Community Lawrence J. White * Stern School of Business New York University Lwhite@stern.nyu.edu Presented at the American Bar Association Antitrust Section’s “Antitrust Symposium: Competition as Public Policy” Jackson Hole, WY May 13-14, 2009 Revised draft: June 9, 2009 Comments and suggestions welcomed. Abstract The U.S. financial crisis of 2007-2008 has been a searing experience. The popping of a housing bubble exposed the subprime lending debacle, which in turn created a wider financial crisis. In its response to this crisis, the federal government has provided financial assistance to a number of financial institutions that are often described as “too big to fail” (TBTF) – which, to those who associate antitrust with size, seems to bring antitrust potentially into the picture. This paper will offer a guide to the antitrust community that will cover the U.S. financial sector, financial regulation, and the debacle and subsequent financial crisis. The tensions that can arise between financial regulation and antitrust will be highlighted. TBTF is not one of them, however, because TBTF is about size and interconnectedness, but not about competition and market power. Although much progress has been made in removing anticompetitive elements from financial regulation over the past three to four decades, there are still important advances that can be made. The paper concludes by offering a set of policy recommendations for the removal of some of the important remaining elements of financial regulation that impede competition. Keywords: Antitrust; regulation; competition; too-big-to-fail JEL codes: G18; G21; G28; K21; K23; L49; L51 * Lawrence J. White is Professor of Economics at the NYU Stern School of Business; during 1986-1989 he was a board member of the Federal Home Loan Bank Board and in that capacity was also a board member of Freddie Mac; during 1982-1983 he was the chief economist at the Antitrust Division of the U.S. Department of Justice. Thanks are due to Martin Lowy and to participants at the ABA’s “Antitrust Symposium: Competition as Public Policy” for helpful comments and to Aaron John Danielson for data collection assistance.
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2 I. Introduction The U.S. financial crisis of 2007-2008 has been a searing experience. The popping of a housing bubble exposed the subprime lending debacle, which in turn created a wider financial crisis, which has had international ramifications; and the weakened financial sector has contributed to a U.S. recession that currently is the worst since the early 1980s and that may become the worst since the Great Depression of the 1930s. One theme in discussions of the crisis has been the roles and regulation of very large
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