Over at VoxEU.org, the debate on how to save the world continues. One of the best recent commentaries--by which I mean one that I wish I had written--comes from Katharina Pistor. The title says it all: "Reforming the Financial System: Beyond Standardization on “Best Practice” Models."
Most of the current approaches presume that we will have to have more financial regulation at the international level. This in turn presumes that there will be some convergence on what the "right" models of regulation are. As Katharina points out, this is neither necessary nor desirable.
The idea that effective market regulation can be achieved by standardizing rules and regulations on the most successful model at the time is deeply flawed for the following reasons. First, it treats legal institutions as endowments and ignores the need for maintenance and adaptation not only to local conditions, but also to future change. Second, it creates the illusion that a given market is institutionally sound and thereby disguises problems that may trigger future crises.
An alternative strategy to financial market regulation should make room for experimentation:
Experimentation with alternative regulatory approaches is more likely to produce solutions to new problems than standardizing rules on a single, but potentially flawed, model. Assessments of regulatory regimes could follow a “comply or explain” strategy as an alternative to benchmarking. Moreover, policy makers should play a greater role in disseminating alternative models and explaining their trade-offs rather than endorsing a single one.
The big question when you allow countries to adopt different regulatory regimes, and the one Katharina does not tackle, is how you prevent financial institutions from arbitraging these differences away by locating themselves and their activities in jurisdictions that impose the lowest immediate cost on their operations. In other words, can you run such systems without also allowing a certain amount of capital controls? I don't think so.