Economics

Barone: Unregulated Firms to Bail Out Regulated Ones

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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.

NEXT: A Rose By Any Other Name....

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  1. Why should we watch a Richard Belzer video about this topic?

  2. In that vein Frank, one of the most brainiest dead members of Congress,

    Fixed

  3. This is why it’s so critical that people–included our elected overlords–understand the role that government had in this mess. If the government had been yelling “stop” five years ago but was ignored, then they’d have an argument. But they didn’t see this coming, either. Even those that thought Fannie/Freddie should be reined in didn’t think anything like this was going to happen.

    It’s obvious that government controls, safety nets, and tampering with the money supply did more to cause the problem than to avoid it. More of the same will do us no good at all. When the economy recovers, it’ll be despite government action, not because of it.

  4. Right, Barone!

  5. If the government had been yelling “stop” five years ago but was ignored, then they’d have an argument.

    Well, Ron Paul was yelling it and was ignored and he is and was at the time part of the government. But, yeah, other than him, I agree.

  6. Oh and BTW, my biggest complaint about the RP campaign was that he spent too much time on foreign policy and not enough hammering economic issues.

  7. Well, Ron Paul was yelling it and was ignored and he is and was at the time part of the government. But, yeah, other than him, I agree.

    Was that when he was wanting to put all of the Black people in jail, or after?

  8. In that vein Frank, one of the most brain dead members of Congress,

    Fixed

    Why do people think Frank is smart? Is it the same fantasy thinking where Joe Biden is smart?

  9. Why do people think Frank is smart? Is it the same fantasy thinking where Joe Biden is smart?

    Just because you cannot see how brilliant they are does not mean they are not smart. It says more about you.

    Wasn’t Radley praising Sen. Frank after testifying before his gambling committee a few months ago?

    Can’t have it both ways.

  10. I’m not sure, Epi. Maybe it has something to do with the fact that he’s painful-to-look-at ugly and has a painful-to-listen-to voice. Surely he must have some redeeming quality that we’re not seeing for our prejudices?

  11. Epi,

    People confuse charm with brains. Franks can be a funny and charming guy. In reality he has the intellect of a below average 10 year old when it comes to anything related to the economy. But since he is funny and charming people think he is smart. Also, he is a liberal so the media portrays him as smart because all liberals are smart in their eyes.
    Basically people think Franks is smart for the same reason they think are current dimwitted President is smart.

  12. Surely he must have some redeeming quality that we’re not seeing for our prejudices?

    You’re just a homophobe, Moose. I, on the other hand, am a Massholephobe.

  13. Hedge funds are not monolithic but the worst were always the source of financial shenanigans. From Long Term Capital Management to the Bear Sterns funds – they were the unregulated sponges that soaked up the non-conforming mortgages that FNM/FRE were disqualified from purchasing that drove this debacle. LTCM shook the financial markets in the late 90’s and in 2004-06 Bear and other Wall Street firms were 50x worse.

    The worst of the regulated, depository banks (WaMu) was easily absorbed after the FDIC shut them down. If that had been the model then this crisis would have been shunted.

    Too many folks here listen to fat Oxy-snorters on AM redneck radio to get their financial news.

  14. Yeah, so anyway, I think the point is the suck the “unregulated” into the mess of the regulated thus making them regulated.

  15. Who is the smart guy in Congress, now? I agree, I think Frank isn’t it and not just because I don’t like him or his politics. Moynihan used to be the acknowledged intellectual in Congress, but no one comes to mind as his successor.

  16. Shirke,

    What the hell did you just say? If the unregulated hedge funds were the worst, why aren’t they the ones sucking up the TARP funds? Typing a bunch of nonesense with some vailed shot at Rush Limbaugh is a pretty sorry excuse for thought.

  17. Who is the smart guy in Congress, now? I agree, I think Frank isn’t it and not just because I don’t like him or his politics. Moynihan used to be the acknowledged intellectual in Congress, but no one comes to mind as his successor.

    John F. Kerry and Ted Kennedy

  18. Pro,

    There are no giant brains in Congress anymore. Honestly, Tom Colburn who is at least an MD and has an ounce of common sense is probably the brainiest of the bunch.

  19. “John F. Kerry and Ted Kennedy”

    Stop fucking trolling your retarn. You are not even good performance art. You can’t argue a position. You just say stupid shit. Just go away. You have long ceased to be entertaining if you ever were.

  20. John,

    You are the “retarn” on this blog.

  21. Stop fucking trolling your retarn.

    I have no idea what this means, but i agree with the sentiments that follow.

  22. Why do people think Frank is smart? Is it the same fantasy thinking where Joe Biden is smart?

    it’s the same formulation that makes Hillary, who couldn’t pass the DC bar, was duped by Bill & Dubya, outsmarted by Obama, & unable to find a Russian translator at the State Dept., The Smartest Woman In America.

  23. You are not funny Tofu dickhead or whatever you go by these days. Lefiti at least was kind of funny. And his imposters were very funny. You, in contrast produce nothing of value. No humor no whit, nothing.

  24. “it’s the same formulation that makes Hillary, who couldn’t pass the DC bar, was duped by Bill & Dubya, outsmarted by Obama, & unable to find a Russian translator at the State Dept., The Smartest Woman In America.”

    Next you are going to tell me that her husband being the governor of Arkansas had something to do with the success of her law practive in Arkansas rather than her incredible intellect. I am shocked. You mean our elites are not as brilliant as they claim to be?

  25. John,

    Thank you for your kind review. I will include it on the dust jacket of my next book “comments from the Left on Hit & Run”.

  26. What the hell did you just say? If the unregulated hedge funds were the worst, why aren’t they the ones sucking up the TARP funds?

    They are!

    Merrill and Bear Stearns are now part of JPM and BAC – thats about $90 billion. AIG hedge activities have soaked up $170 billion and counting.

    Lehman cost untold hundreds of billions.

    Hedge funds don’t hang a fucking shingle out with the term “hedge” in their name.

    And “Senator Franks” took over the House Finance chair in 2007 when the bubble had blown up.

    Fat Rush is rotting your brain.

  27. Retarn is a word. It means to remake or repair a small mountain lake or pool, especially one in a bowl-shaped, steep-walled mountain basin carved by glaciation.

  28. TofuSushi,

    The thing is dumbass is that there is such a thing as “leftist” position. Anyone paying attention with half a brain could articulate that position. But that position requires a little more thought than saying something as stupid as Kerry and Kennedy are the brains of the Senate. That is just an insult to people’s intelligence.

  29. John,

    Maybe you should go back to tending your mountain pools and stimulate the economy?

  30. Ezra Kleing thinks Kennedy is brilliant. That is good enough for me.

  31. “And “Senator Franks” took over the House Finance chair in 2007 when the bubble had blown up.

    Fat Rush is rotting your brain”

    First, anyone who uses the word “Rush” in an argument is fucking mouth-breathing moron who needs what is left of their brains kicked in across the sidewalk. Period.

    GET IT THROUGH YOUR THICK FUCKING HEAD. NO ONE WHO READS REASON LISTENS TO FUCKING RUSH LIMBAUGH!!!

    So stop referencing someone no one listens to or cares about. Whatever weirdo paranoid homosexual obsessions you have with the man is your problem not ours.

    So hedge funds have ate up $170 billion of about $2 trillion in TARP. How does that prove they are the problem? Where did the other 1.7 trillion go?

    Franks was a powerful minority leader before 2007. He was getting big money from AIG and from Freddie and Fannie and doing everything he could to make sure nothing was done to stop the bubble. Go watch him on youtube sometime in the 2003 hearings saying there was no problem at all in the housing market.

  32. The salty language sure does enhanse your argument John.

  33. Franks a “powerful minority leader”?

    You’re a joke. A member of the minority party in the House can’t even schedule a room to hold a meeting in.

    1/435 is not “power”. Barney Frank was virtually non-existent in the creation of this mess.

  34. Retarn is a word. It means to remake or repair a small mountain lake or pool, especially one in a bowl-shaped, steep-walled mountain basin carved by glaciation.

    the industrious beaver is nature’s retarning agent.

  35. I would just like to point out that Barney Frank being a fool and Barney Frank being one of the brainiest members of Congress is not necessarily a contradiction.

    A member of the minority party in the House can’t even schedule a room to hold a meeting in.

    Lets keep this one in the memory banks for later, when shrike tries to blame whatever failures are coming our way on the Republicans.

  36. Johnny,

    As are the less industrious but more patient glaciers. Unfortunately, the ancient art of retarning is threatened by global warming. Won’t you give?

  37. Hedge funds don’t hang a fucking shingle out with the term “hedge” in their name.

    John Paulsen’s did.

  38. First, anyone who uses the word “Rush” in an argument is fucking mouth-breathing moron who needs what is left of their brains kicked in across the sidewalk. Period.

    Not true, especially if the name Geddy Lee is also a part of the argument.

  39. PL,

    Not to worry. I’ve got a plan to relocate the threatened tarns to other environments. At last they can escape the ghettos of high latitude alpine areas, and exist alongside oases and lagoons as God intended.

    In time, nature will evolve new retarners. I have high hopes that Australia’s mallee fowl will step into the role.

  40. No, I disagree. Technology is the answer to retarning. And to refjording, which is also threatened by mankind’s great ?????.

  41. We won’t see John until after three, when he is done getting his talking points from Rush Limbaugh.

  42. What I don’t understand is how the same liberals who decry the ordinary stock market as being a casino or even an outright scam want to make it so that an ordinary ‘investor’ can get in on the action.

    (I would like it if anyone were able to speculate on this)

  43. Why do people think Frank is smart? Is it the same fantasy thinking where Joe Biden is smart?

    He is smart. He was smart enough to deflect criticism and investigation on Freddie and Fannie when the ramp-up to the housing finance problem was becoming super-heated.

    Barney Frank in 2003:

    The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn’t bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.

    http://www.taxfoundation.org/blog/show/23617.html

    (includes unedited CSPAN video)

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