Yesterday, in Squam Lake or Swamp, I noted that four economists on the faculty at the University of Chicago signed on to a report on financial reform that treats this as a Keynesian moment and ignores Hayekian issues. Today, thanks to a pointer from Mark Thoma, I find that Luigi Zingales writes,

There are few areas in which government intervention is known to create value: reducing the devastating effects of a bank run is one. Only a government that is sufficiently powerful, in terms of legal authority and solvency, can do so. Unfortunately, in the international arena these two conditions are almost never met. Empowering the IMF to take over failed international banks would fill this gap – and chase away our worst nightmare.

Large banks have subsidiaries in many countries. This makes it hard to resolve the failures of these institutions–whose bankruptcy law applies? Hence, Zingales is drawn to a world-government solution.

I cannot imagine a more horrifying idea. Even if you think that the IMF truly would do the best job of resolving international bank failures, does anyone believe that there would be no further expansion of world-government power once this precedent has been set?

From my point of view, it would be preferable to require U.S. banks to divest all foreign subsidiaries unless they can obtain written understandings that resolution of those subsidiaries will be under the jurisdiction of the U.S. legal system.