Checking Dani Rodrik’s blog I’d noticed a new post that’s really pretty sharp. First, Dani had noticed an interesting post at Vox’s Global Crisis Debate by Katherina Pistor. I liked Katherina Pister’s post at Vox too. In fact, I’d say that Dani actually underestimates the potential of the thinking that underlies that post. The key excerpt:
The major argument against standardization as the cure all for financial crisis, however, is not that the wrong model was chosen. Nor is it the most common critique of legal standardization, namely that one model does not fit all. Instead, 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. Third, the selection of ‘best practice’ models tends to reward regulatory regimes based on simple quantitative outcome variables, such as market size, even when market size may be the product of a bubble, while ignoring volatility and other risk factors.
So here’s my response to Dani (cross-posted over at his excellent blog also):