The Fed as Crime Fighter?
In an otherwise interesting post regarding Fed officials’ sympathy for banks to engage in “regulatory capital arbitrage,” Arnold Kling writes:
The thinking [by Fed officials] was that the Basel capital accords required banks to hold too much capital for mortgages (this was probably true). Accordingly, the article [by a Fed official] takes a sympathetic view of regulatory arbitrage. In retrospect, this is a bit like watching a movie in which a jailer becomes sympathetic to a prisoner, when we know that the prisoner is eventually going to escape and go on a crime spree.
In the comments I wrote:
Except, the crime doesn’t occur until the jailer looks at all the bad investments the escaped con makes, and then the jailer robs the whole neighborhood to pay off the bad loans.
