The Descent of Regulation?

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Via Andrew Stuttaford, an interesting article in The New York Times by Niall Ferguson, author of the very good book/television series The Ascent of Money. It's worth cutting-and-pasting a large chunk of the piece, in which Ferguson disputes the notion that excessive deregulation is behind the current financial crisis. An extended sample:  

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis—or predicted the wrong crisis (a dollar crash)—have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we're in now. Third, the continental Europeans—who supposedly have much better-regulated financial sectors than the United States—have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the "Anglo Saxon" financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks' balance sheets, so that (for example) the ratio of Citigroup's tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada's banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

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  1. But, but, but….that doesn’t feed my left wing ego that says the cattle need me to protect them from their own stupidity.

  2. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy.

    That has already been well explained…

    Now, we also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down. – Barack Obama, 10/14/08

    It’s obvious that the cause of the recession was George Bush instructing the Fed to do all that trickle-down stuff like Obama was talking about. Now look at the results. Clearly we must re-regulate the economy, and not just finance but energy, labor, and newspapers.

  3. Not only did deregulation begin in 1980, it ended with the close of the Clinton administration.

  4. “all that trickle-down stuff”

    You mean like the trickle down that Obama is trying with the stimulus package? Toss a bunch of money into the economy and hope it trickles down to the taxpayer in the form of jobs? Rather than just giving it back to those who earned it in the first place and let them spend it as they see fit. That trickle-down type stuff? You are right trickle-down does not work.

  5. One of the things I find most ironic is the number of people claiming that it’s absurd to blame the CRA, which was passed in 1977, because it was so long ago, who them proceed to blame Ronald Reagan, who was elected in 1980.

  6. ‘But, but I’m Obama and I like to lie!’

  7. “That has already been well explained…” followed by the usual George Bush deregulation blah blah blah.

    I sure wish someone would actually point to some of the deregulation that Bush enacted that caused this. I mean specific policy items. Anyone? Seriously. I’m curious.

  8. “I sure wish someone would actually point to some of the deregulation that Bush enacted that caused this.”

    To the contrary, I seem to recall something called Sarbanes-Oxley,passed under Bush, that increased regulation of corporate finance and, according to many experts, caused more problems than it solved.

  9. Hah! I just love how all you libertards fall all over yourselves whenever you come across the tiniest scrap confirming your religious beleifs. It’s all BS except when it fits you’re preconceptions. Cherrypicker, thy name is libertarian.

  10. OK, is the following true? It’s basically Austrian Business Cycle Theory in a nutshell. I’ve spent the last two years trying to figure out whether there’s any merit to it. ABCT seems really compelling, but empirical evidence is scarce at best.

    For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

  11. “The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy.”

    The biggest blunder of all was the creation of the Fed.

  12. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

    That wasn’t a bubble. Just froth.

  13. eight years of failed economic policies promoted by George Bush, supported by Senator McCain…

    And by Senator Obama.

    Ok, he just voted “present”. Tacit approval, in my book.

  14. *fingers in ears*

    LALALALALALALALALALALALALALALALALALALALALALA

  15. You mean like the trickle down that Obama is trying with the stimulus package?

    I wondered what that was, dripping on the back of my neck.

    Hey Lefiti, shut the fuck up, you festering choad.

  16. The reality is that crises are more often caused by bad regulation than by deregulation.

    Really? That’s intriguing. How so?

    For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

    So. . .good regulation is better than bad regulation, and Canada was saved by good regulation. I agree. That’s why I’m a democrat. I’m still waiting to hear some support for this little bit of wishes and make believe that kicked off the paragraph:

    The reality is that crises are more often caused by bad regulation than by deregulation.

    Bad regulation did not cause the crisis, and the piece does not argue it. All it says is that bad regulation failed to prevent it. I fully agree that we need better regulation.

  17. The biggest blunder of all was the creation of the Fed universe.

  18. Bad regulation did not cause the crisis, and the piece does not argue it.

    The Fed being able to dump new money into the economy on a whim is a form of regulation. I agree that Bush-type “deregulation”, where the monetary gas pedal is pushed all the way down at the same time as the financial sector brake lines are bled, is not a good idea. That’s not what deregulation is, though.

  19. The Fed being able to dump new money into the economy on a whim is a form of regulation. I agree that Bush-type “deregulation”, where the monetary gas pedal is pushed all the way down at the same time as the financial sector brake lines are bled, is not a good idea. That’s not what deregulation is, though.

    To be fair, it’s really more Reagan-Bush-Clinton style deregulation.

    As far as the Fed, I’m not knowledgeable enough to comment. But as far as regulation, I believe it is absolutely necessary in the financial sector, because the hazard of losing someone else’s money will never equal the incentive of making profits off of someone else’s dividends.

  20. Xeones,

    LOL I was actually serious. It kills me to hear the left trash trickle down theory when it is the basis of the Keynsian-style stimulus being pushed by the current administration. Push out the money and let it trickle down, the difference being it is ok if the government pushes the money out to trickle down. It is only bad in their eyes when industry creates the jobs through innovation. In short liberals / Obamabots are bigger on trickle-down. I guess in my sarcasm I presented it wrong. FAIL on my part.

    Please do not refer to me as the asshat troll Lefiti.

  21. Don’t forget the laws that let banks hold residential mortgage back securities as their FDIC collateral. This spread the rot of the Freddie Mac and Fannie Mae throughout the financial system even in banks that didn’t make risky loans but just wanted to have secure collateral.

    The problem with regulation is that the regulators often have other motives than protecting the integrity of the system. In the last few decades, politicians had more incentive to give voters home ownership than they were making sure that the financial system that supported the housing market was working. Politicians of both parties progressively dismantled the risk assessment feedback mechanism in the financial markets in order to induce more lending than the free-market would support.

    The entire theory of regulation presumes that there exist some people whose have a constant incentive to maintain the transparency and integrity of the financial system. These people usually hang out with Tinkerbell.

  22. ABCT seems really compelling, but empirical evidence is scarce at best.

    An Austrian would tell you you’re wasting your time looking. Eschewing empiricism in the study of economics is what the Austrian school is all about.

  23. Bad regulation did not cause the crisis

    The FED was the primary cause of the crisis. How the fuck is that not bad regulation?

    I have a lot of blame to spread around, Fannie, Freddie, idiotic banks, idiotic borrowers. But the max amount belongs on the Fed.

  24. The fact that Austrians were screaming HOUSING BUBBLE! ITS GOING TO CRASH!!! back in 02 and 03 is a bit of empirical evidence.

  25. Blaming Bush for deregulation is some kind of Orwellian double-speak. The man was marginally to the Right of Bill Clinton, and so now – according to the press – he embodies individual rights, free markets, etc.

    To listen to the media, you’d think W was up all night rereading Rand novels, and plotting the demise of the 40 hour work week.

  26. As a subprime mortgage banker, the notion of deregulation is abusurd. The fact is that very little regulation or deregulation occured on the Federal side of lending but on the state and local level “predatory lending” legislation was common place. From the mid-90’s on many, many states, counties and cities passed laws limiting what loan products companies could originate, fee and interest rate caps, required “counseling” and legal recourse for investor who bought subprime loans.

    The majority of these laws were passed in the areas that are ground zero for subprime lending.

    Deregulation – my ass!

  27. How bad was the sub-prime market? One of the irritating people I know was able to make a decent living – for awhile – selling sub-prime mortgages. He wasn’t sleazy, just dense, but if he could sell someone a mortgage, it was pretty much a give away.

  28. In most things Bush represented merely an extension of previous policies and orthodoxy–into radicalism.

    The U.S. has tortured before and done much worse; Bush made those things official U.S. policy.

    “Small government” was in during the 80s and 90s. Bush thought that meant ignoring hurricanes.

    This country was already deep into the fraud of Reaganomics (tempered by Clinton-era fiscal responsibility) when Bush took over and blew what was left of the plutocrats’ wad on it.

  29. This country was already deep into the fraud of Reaganomics (tempered by Clinton-era fiscal responsibility) when Bush took over and blew what was left of the plutocrats’ wad on it.

    Yawn. Just repeating something over and over doesn’t make it true. In reality, Bush was the very embodiment of the big-spending, regulate-everything, nanny-government philosophy. That should be painfully clear now that George Bush III is in office.

  30. plutocrats! oh noes! Clinton-era fiscal responsibility… mmm soothing.

  31. Tony,
    It’s very late and I have a lot of Irish whiskey in me which gives me an excuse for my inability to understand nuance (and spell) – but your last comment leaves me at a loss. Is it some sort of macro over the top “everything GOP’s profess is evil” diatribe – WTF?

  32. BTW – Tullamore Dew is like heaven on earth.

  33. now – according to the press – [Bush]… embodies individual rights, free markets, etc.

    Free markets, yes, but to the left free markets make slaves of us all.

    hardly anyone sees Shrub as strong on individual rights.

  34. “Bush thought that meant ignoring hurricanes.”

    Ahh…the people who ignored Hurricane Katrina were Ray Nagin and Governor Blanco. You know, the folks that are actually responsible for that stuff.

  35. The biggest blunder of all was the creation of the Fed.

    I’m not usually an anti-Fed fanatic but it is more and more looking like this clusterfuck is (as the annoying Austrians predicted) a product of the easy money and bust>inflate bubble>burst>reinflate bubble cycle.

    Ha ha! You fool! You fell victim to one of the classic blunders! The most famous is never get involved in a land war in Asia, but only slightly less well-known is this: never go in against a Sicilian when death is on the line!

  36. I wonder what kind of empirical evidence that would support or debunk Austrian Business Cycle Theory would satisfy Flex Nasty BIG?

    Austrian theory holds that merely accumulating statistical data from the past does not give predictive potential. Nor can merely quantifying data in the present disprove a logical argument.

    For example, it can be logically demonstrated that raising the minimum wage will cause jobs to disappear or not be created. (The opposite of Obama’s “save or create jobs” mantra).

    However, it is impossible to know all the relevant factors at work in the moment that affect a particular increase in the minimum wage in a particular place. So a statistical formula to predict how many jobs Y will be lost by raising them minimum wage by X is not scientific, it is guess work at best.

    EG Perhaps the state that raises the minimum wage also implement tax subsidies to hire. Or a recession muddies the unemployment statistics. Or any other historical accident or government intervention could mask the loss of jobs due to the raise in the minimum wage.

    So, according to Austrian economics, it is impossible to prove or disprove a logically sound economic law by using empirical methods.

    Nor can you predict with any real accuracy when a result of the disobedience of the law will occur. Unlike charlatans like Lyndon LaRouche, Ron Paul and other Austrians never pretended to predict exactly when the bubble would burst. (Although some came pretty close to a good prediction). The most they could say was that every new intervention by the Fed if successful was only postponing the inevitable crash with more inflation.

  37. The problem with regulation is that the regulators often have other motives than protecting the integrity of the system.

    That, plus the fact that regulators generally operate with much poorer information than the people they regulate.

  38. [i]One of the irritating people I know was able to make a decent living – for awhile – selling sub-prime mortgages. He wasn’t sleazy, just dense, but if he could sell someone a mortgage, it was pretty much a give away.[/i]

    Jimmy Carter sold subprime?

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