Barone: Unregulated Firms to Bail Out Regulated Ones


Via Instapundit comes this interesting Michael Barone column, re: Geithner Plan to make everything wonderful:

I have noticed what I think is a paradox in the Geithner plan. He is asking the most unregulated parts of the financial system-hedge funds, private equity firms-to bail out the most regulated part of the financial system-the banks. With government help, or subsidy, of course. But of course the government isn't really regulated either, is it? Except, I suppose, through the political process.

Democrats like Barack Obama and Barney Frank, at least on the campaign trail or in sound bites, have portrayed the financial crisis as the product of deregulation. The solution, they say, is more regulation. In that vein Frank, one of the brainiest members of Congress, is proposing that the Federal Reserve become a regulator of systemic risk, with the power to regulate firms that because of their size or strategic position are of systemic importance.

My American Enterprise colleague Peter Wallison has argued powerfully that this is a bad idea. Neither the Federal Reserve or other regulators identified the systemic risk which caused this crisis. Neither did most financial institutions or investors. Systemic risk is hard to identify for the very reason that it is systemic: It results from just about everyone doing what turns out to be the wrong thing. (Housing prices will always go up, therefore there is no risk in buying mortgage-backed securities, etc.) Identifying some firms as posing systemic risk is saying that they are too big to fail, in which case they'll take undue risks and end up having to be bailed out by the government. These strike me as very strong arguments.

Whole thing here.

Speaking of Peter Wallison, here's the talk on the roots of our current predicament he gave at Reason's 40th anniversary event last fall in Hollywood (go here for podcast version and related links). Approximately 25 minutes.