The Thermostat Theory of Financial Regulation

Brian Doherty | September 28, 2009

Economist Arnold Kling wonders why some analysts who seem to lament the repeal of Glass-Steagall don't also openly plump for its return, or have a coherent theory of how its lack contributed to the Current Crisis:

People are not specifically arguing that Glass-Steagall was wonderful regulation. Instead, they are waving around Glass-Steagall in order to make a vague, generic claim that regulation works and deregulation fails.

...In contrast, I say that housing policy, securitization, and regulatory capital arbitrage were at the heart of the crisis. I propose changing housing policy to stop trying to use cheap, lenient mortgage credit to promote affordable housing. I propose disconnecting the feeding tube of government support from the mortgage securities market. And I propose attempting to make failure of financial institutions a viable, credible option for regulators. There is a connection between my proposals and what I see as the causes of the crisis.

[Others seem to think that] financial regulation is a thermostat, which you can set on "more" or "less." As long as you turn it toward "more," everything will be fine. Never mind what actually caused the crisis (regulatory capital arbitrage) and what was actually irrelevant to the crisis (the erosion of competitive boundaries between commercial and investment banking). Just adjust the regulatory thermostat to "more."

Arnold Kling talking bailout over at Reason.tv.

Comments

|9.28.09 @ 9:20PM|#

This post does not give power to the Obamassiah, and is therefore racist.

|9.28.09 @ 9:29PM|#

Deregulation is bad, because the process of drafting and implementing laws and regulations is so divinely perfect.

|9.28.09 @ 9:32PM|#

The only person I have heard say that the repeal of Glass-Steagal was a bad thing is Wayne Rogers from the Saturday Foxnews show Cashing In, and he has not given a good explanation why its repeal contributed to the current crisis either.

|9.28.09 @ 9:48PM|#

The only person I have heard say that the repeal of Glass-Steagal was a bad thing is Wayne Rogers from the Saturday Foxnews show Cashing In, and he has not given a good explanation why its repeal contributed to the current crisis either.

I had a now ex-friend try the Glass-Steagal argument last October, before he resorted to calling me a racist to my face for disagreeing with that week's Dem party talking points.

Hugh Akston|9.28.09 @ 9:52PM|#

Oh you guys and your facetious tautologies. It's not like that. Regulation is good because civic-minded public servants are accountable to the people whose interest the regulations serve.

You see, legislators (or their aides, or lobbyists, if they are too busy storing greenbacks in freezers or soliciting anonymous sex in airports) write broad regulatory mandates. They do such a good job that incumbents are reelected a whooping 80% of the time or more, despite approval ratings that rarely peak above 40%. The President, who gets one performance evaluations over a span of eight years, signs the legislation and appoints an unelected golfing buddy to execute it. That good ol' boy delegates the regulation to various agents, who just so happened to have been in the same fraternity with both the people who appointed them, and the people they are regulating! They pass the "who's hot/who's not" lists along to the next several layers of unelected enforcement drones, who, thanks to the public employees unions, couldn't lose their jobs if they murdered somebody.

Greedy, heartless, profit-lusting corporations, on the other hand, are only accountable to their customers, suppliers, stockholders, boards, creditors, competitors, and the law.

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|9.29.09 @ 12:16AM|#

Also, thermometers work best when briskly shoved up the patient's ass, which bears a strong resemblance to the way the bailouts were passed.

Paul|9.29.09 @ 2:52AM|#

The regulation industry is too big to fail.

MJ|9.29.09 @ 7:03AM|#

Thermometers and thermostats are two different things.

@|9.29.09 @ 7:46AM|#

I had a now ex-friend try the Glass-Steagal argument last October

People who live in Glass-Steagall houses...

Brian Doherty|9.29.09 @ 10:54AM|#

MJ--Indeed, my mental glitch. Hed has been adjusted.

President William Jefferson Cl|9.29.09 @ 12:27PM|#

Ah repealed Glass-Stegall back in 1999. Ah've been out of office for almost nine years, and ah still get blamed! Can't ah catch a break?

monolith|9.29.09 @ 1:20PM|#

If you are going to give investment banks huge amounts of money i can see why a glass steagall act might be called for.
though surely its best not to give massive financial help to investment banks.