Well, it seems that analyses like Calvo-Loo-Kung are looking at a tradeoff between benefits from financial deregulation with the costs, but where can we see the benefits empirically? Growth was no better in the USA after financial deregulation than before. The costs are clear in the current crisis. First benefits need to be established, and they haven’t been yet, otherwise there are only minuses.

Basically, some benefit from financial deregulation has to established. Currently, supporters of financial deregulation, when faced with the current crisis, handwave about some “benefits” from deregulation, and then equivocate.

From Calvo-Loo-Kung “Although it is much harder to establish that financial development causes growth, few would doubt that, at least temporarily, financial deregulation could promote higher growth.” Well, actually I would.

“We base our analysis on estimates of the costs of financial crises in emerging market economies (since the 1980s), a cauldron of financial crises in the last thirty years.”

Their selection of dates is very convenient, where they use the low period as the 1980s, which was Latin America’s lost decade. A more useful comparison would be the 1950-1960s where financial deregulation hadn’t begun anywhere, even Chile, but this was not a low growth period, which is probably why this wasn’t done. Plus, there are many different policies enacted over this period, some good and some bad. Argentina’s boom in the 1990s was not just about financial deregulation. Also, n=2 right?

So to have a real discussion about welfare, we need to find some more numbers on welfare benefits from financial deregulation, so far I’m not convinced. Welfare concerns are important, but I’d be willing to sacrifice a non-zero amount of output to never see 10% unemployment again. How has welfare in the USA increased on net from financial deregulation?

“New Deal financial regulation” is Glass-Stiegel? If so, same question. Are we optimizing by minimizing the risk of systemic disruption (whatever that is) or are we maximizing welfare?

Basically, how do we apply the successful New Deal financial regulation to the shadow banking system? For me, that’s the main question. How many banking or financial crises between 1933 and 1980? That’s no coincidence. This is why there has been a long time between banking crises.

Or do you imagine we can derive from first principles the perfect bank failure model with no need to subject it to data?