Paul Krugman writes about GE’s announcement to get out of the finance business. Why are they getting out? Financial reform from the Dodd-Frank legislation that includes “greater oversight, higher capital and liquidity requirements, etc.”
Paul Krugman says…
“And sure enough, what GE is in effect saying is that if we have to compete on a level playing field, if we can’t play the moral hazard game, it’s not worth being in this business. That’s a clear demonstration that reform is having a real effect.”
Standards are tightening in the financial business to prevent moral hazard. Higher liquidity and capital requirements will go hand-in-hand with the Fed’s intent to raise interest rates. So I see a positive side to normalizing interest rates in that some socially risky shadow banks will opt out.
Less shadow banks could translate into an easier time for normalizing the Fed rate. We wouldn’t have these shadow banks doing arbitrage and such with their moral hazard to put downward pressure on interest rates.
What do the readers of Angry Bear think? Does financial reform make normalizing interest rates easier? Does the lack of financial reform cause the Fed rate to seem stuck at the zero lower bound? Can the Fed rate rise without good financial reform? How important is financial reform to the normalizing of the Fed rate?