"A Coordinated Effort to Destroy Effective Regulation"

Fred Block, an economic sociologist at UC Davis, explains the political changes that led to the financial crisis:

Mortgage Meltdown for Dummies: Defining the Changes We Need, by Fred Block, Dissent: ...[T]he escalating crises of the housing and financial sectors have the potential to concentrate our minds on the specific reforms that our nation urgently needs. This requires understanding how our current problems are a direct result of the policies pushed by Republican Presidents from Ronald Reagan to George W. Bush.

The story begins with systematic efforts by Ronald Reagan to dramatically reduce the regulation of financial markets and facilitate a huge transfer of income and wealth to the highest income households. These policies were embraced and expanded by later Republican presidents and “succeeded” in producing a new era of income inequality and out-of-control financial activity. ...

Starting in 1981, Ronald Reagan set out to deliver on two major changes that he had promised his business supporters. He significantly rolled back government regulation of the financial sector... At the same time, Reagan cut taxes for the very rich, a policy initiative that was replicated by George W. Bush. Taken together, these steps facilitated a dramatic shift of income...

As the rich grew wealthier, they invested growing amounts in hedge funds that pursued risky strategies to earn annual returns that were far higher than those available for ordinary investments... The government never regulated these funds because they were closed to most people; one had to exceed a certain wealth threshold to play. The theory was that these already rich investors could cope if these highly speculative investments turned bad. ...

As hedge funds grew increasingly successful, they produced rate of return envy among established financial institutions. Pension funds, for example, wanted a piece of the higher return action and started putting some of their money into these unregulated funds. The big investment banks, similarly ... started imitating the strategies pioneered by the hedge funds. Many of them, like Bear Stearns, were even allowed to create their own hedge funds. ...

This is where the subprime mortgages come in. Starting in the 1990s, some independent mortgage brokers and mortgage firms figured out how to make money by lending to poor people who could not qualify for standard mortgages. The firms acted just like the local pawn shop, appealing to relatively desperate people who would be willing to pay substantially higher interest rates if only they could own a home. ...

Since housing prices, even in low income neighborhoods, were rising steadily, the lenders thought they faced little risk. Even if the borrower defaulted, the lender could always foreclose and sell the house for an even higher price... [B]ankers were eager to package large bundles of these mortgages and resell them to hedge funds and other investors. ... Hedge funds bought huge quantities..., usually using borrowed money..

This whole house of cards rested on the assumption that housing prices would continue the rise... But as subprime lending expanded, so too, inevitably did foreclosures, and as more foreclosed properties hit the market, prices started heading downward. ... By February 2008, almost nine million homeowners ... owed more on their mortgages than the house is worth, and that number is bound to rise...

[A] task for a new administration is to reverse the mistaken policies that created this mess. The right-wing experiment with free market orthodoxy has been a complete and total failure. It is time to repair the damage by driving the top 1 percent share of household’s income back down... We also need to restore effective regulation to all corners of the financial sector, especially hedge funds. ...

About that regulation:

Hiding behind the invisible hand, by Paul Krugman: Pretty good story on the coming fight over financial regulation. But it lets the Bushies off way too lightly, by suggesting that lack of coordination between agencies led to the awesome failure of regulators to take action against the bubble:

Except for the Federal Reserve, all of the federal bank agencies receive funding from fees paid by member institutions, and some specialists have long argued that the agencies competed with each other to woo institutions with lighter regulation.

“There was no federal coordinated oversight, and as a result there was a competition to reach the bottom, both in federal and state organizations,” said Brian C. McCormally, a former enforcement chief at the Office of the Comptroller of the Currency.

Actually, there was plenty of coordination — a coordinated effort to destroy effective regulation:

Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

The lack of oversight, in short, was no oversight: it was part of the plan.

Here's some of the "Pretty good story":

In Washington, a Split Over Regulation of Wall Street, NY Times: As Congress and the Bush administration struggle to contain the housing and credit crises ... a split is forming over how to strengthen oversight of financial institutions after decades of deregulation.

The administration and Democratic lawmakers in Congress agree that the meltdown in credit markets exposed weaknesses in the nation’s tangled web of federal and state regulators...

But the two sides strongly disagree about whether, after decades of a freewheeling encouragement of exotic new services and new players like hedge funds, the pendulum should swing back to tighter control. ...

Given the philosophical differences about the value of government regulations, some experts were skeptical that Congress and the Bush administration would agree on more than cosmetic changes.

“There is a political will, but I’m not certain that it can overcome longstanding philosophic objections to dealing with free markets in a crisis environment,” said Arthur Levitt Jr., the chairman of the Securities and Exchange Commission under President Bill Clinton. ...

Regulations can make markets work better, so it's not clear to me why those who believe in the power of markets have such a knee jerk reaction against any kind of regulatory oversight.

One way regulation can help markets function efficiently is to require that full and truthful information be made available to all market participants. We see regulations like this so much that we take many of them for granted, e.g. weights and measures regulations, truth in advertising and labeling, full disclosure rules in housing markets, and so on. Without government to enforce these rules, markets can break down or lose efficiency.

One aspect of the problems in financial markets is exactly like this, information is incomplete or asymmetric, and these problems are pervasive. For example, complicated financial instruments are difficult to evaluate because they lack transparency. Currently, with all the financial turmoil, nobody is sure what they are worth, market participants don't have the information they need to make that determination, and many markets have broken down entirely. Similarly, there are also information problems in real estate markets, with real estate agents and mortgage brokers much better informed about the variety, eligibility, and terms of loan products than their customers. This made it easy for real estate agents and mortgage brokers to steer customers into loans that were profitable, but not always in the best interest of their customers. On the other side, customers don't always reveal truthful information about their situations, e.g. their income, debts, etc., and this can also lead to inefficiencies (and sometimes both sides work together to fool the next person in the chain).

There are many other regulations that are needed besides those intended to increase available information, one example is increasing capital requirements, and different regulations address different market failures. Not only do we have information problems in these markets, we also have moral hazard issues of the type that occur when people do not have enough of their own money at stake when taking on risky investments using other people's money (borrowed or deposited). Capital requirements will likely encounter more resistance than measures to increase transparency, but it is a means of reducing excessive risk taking and the options need to be fully explored.

There's a lot more to do, redefining what a bank is, and then bringing all banks under a consistent and central regulatory authority, rethinking the discount window (we are likely headed to a channel/corridor system anyway, so it's a good time to rethink the whole operation, what assets can be traded, with whom, etc.), but to emphasize the information aspect more, here's Tyler Cowen:

It’s Hard to Thaw a Frozen Market, by Tyler Cowen, Economic Scene, NY Times: Real estate bubbles have burst before, without bringing such trouble to the financial system. What is distinctive today is the drying up of market liquidity — the inability to buy and sell financial assets — caused by a lack of good information about asset values. ... The results have been a form of financial gridlock.

If you think that traders have been well informed of late, take another look at the wild path of Bear Stearns shares: A year ago, the stock was selling for $170 a share. At the close on March 14, just before the deal by which Bear Stearns was to be bought by JPMorgan Chase, Bear had a book value of $80 a share — and a share price of $30. The JPMorgan transaction, arranged two days later, valued the company at about $2 a share. Since then, the shares have been trading above $2, which in part reflects the possibility of the deal breaking up.

Every step of the way, the pricing of the stock has surprised the market — and yet Bear Stearns is a firm with a lengthy history, not an Internet start-up or a biotech whose value is based on a new but untried wonder drug.

To understand the depths of the current crisis, let’s go back to an apparently unrelated episode in economic thought: the socialist calculation debate. Starting in the 1920s, Ludwig von Mises, the leader of the so-called Austrian School of Economics, charged that socialism was unable to engage in rational economic calculation. Without market prices, he reasoned, no one knows how much economic resources are worth.

The subsequent poor performance of planned economies bore out his point. ... The irony is that the supercharged capital markets of the American economy are now — at least temporarily — in a somewhat comparable position. ...

Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.

The absence of trading is a big problem. Financial institutions have been stuck holding illiquid assets, whose value cannot be easily determined. Who wants to lend to the institutions holding them? No wonder there is a credit crisis and a general attitude of wait and see. ...

So what now? Regulators should apply capital requirements consistently to the off-balance-sheet activities of financial institutions. This will limit dangerous leverage, contain contagion effects and make the system less dependent on the steady flow of good information. ...

Update: More on the need for regulation, and on the need to consolidate regulation under a single authority:

U.S. Financial Regulation 2008, by John Tepper Marlin: In late 1999, the bulwark bank regulation of 1933, the Glass-Steagall Act - the wall between investment banks and commercial banks - was torn down. This was a great victory for creative bankers, who had found the wall irksome and restrictive.

The teardown opened the way for the Bankers Panic of 2008.

Senator Carter Glass, who was a leader in the creation of the Federal Reserve System in 1913, saw how the deposits of correspondent banks flowed to New York City where the big banks were tempted to speculate with the funds and he was determined to keep the investment-banking foxes out of the commercial-banking chicken coop. A wall was created around the banking system to prevent bank deposits being used for speculation by investment banks.

When the wall came down in 1999 with the Financial Modernization (Gramm-Leach-Bliley) Act, what was outside the wall should have been brought under expanded regulatory responsibilities of the Federal Reserve or the SEC, or both. ...

I was an economist at the Federal Reserve Board and the FDIC during the William McChesney Martin era at the Fed, and I vividly remember a long-time staff member of the FDIC, a southerner with an amazingly large-brimmed floppy hat, telling me more than once that if you hadn't lived through the Depression you couldn't know how much damage is caused when bank credit dries up and how important it was to keep commercial bank assets from being used for speculation.

Back then, in 1999, the Economist Magazine wondered why the wall between banks and investment banks was taken down without regulatory reform. Two years before, the Brits consolidated their regulatory system. The reason for the persistence of the multiple financial regulatory authorities in Washington (and the states) was given as follows by John D. Hawke, Jr., Comptroller of the Currency ... in 2000: "Regulatory competition has stimulated innovation and efficiency. Competition keeps all of us on our toes, and provides incentives to add real value to our supervision. While the system unquestionably provides opportunities for regulatory arbitrage, there is little evidence that it has stimulated the competition in laxity that former Federal Reserve Chairman Arthur Burns discussed 30 years ago."

Today, competition in laxity and regulatory arbitrage seem good descriptions of what has occurred in financial markets since 1999, at an accelerating pace. The worst possible situation for an institution seeking to avoid regulation is a single regulator. A large number of regulators creates the impression for the consumer that the system is tightly controlled, while creating ample opportunity for innovators to do what they want. Could mortgage bankers have succeeded in processing so many subprime mortgages if borrowers weren't fooled by the paperwork into thinking that the process was under some kind of regulation? Could so many CDOs have been sold if investors in the United States and overseas weren't reassured by the many bank regulators and the SEC and the monoline insurers and the rating agencies that the securities they were buying were as advertised?

If we really want to modernize the American financial system, we need a single government entity in Washington to oversee it. This entity - perhaps a Treasury-Fed-SEC Regulatory Commission - might seek to impose and enforce capital adequacy requirements proportional to risk on all financial institutions and address issues such as moral hazard and disclosure across the entire range of players.

The Economist was right in 1999 to recommend that modernization of the American financial system be accompanied by regulatory reform. On March 19 ("What Went Wrong") the Economist now argues that the financial industry "is unlikely to grow as it did in the 1980s and 1990s. If finance is foolishly reregulated, it will fare even worse." This wobbly sentence needs to be parsed: ...If the sentence means that any new regulations would be foolish, the Economist is pre-judging what the Congress might come up with. New regulations are going to happen. - If the Economist means that new regulations should not be adopted if they are foolish, then who could argue with that?

Update: See Paul Krugman Doesn't Need My Help, by Robert Waldmann

The ... problem is not, say, that commercial banks which were allowed to own common stock gambled and lost. The way in which the Glass-Steagal act would have been relevant is if the investment banks had taken deposits. They didn't. The crisis is based on commercial banks being irrelevant, not on their being allowed to do things they couldn't do before. ...

Comments

[hari]

During this wintry Easter Holidays...the spectacle of how derivatives based hi fi has strangulated the perpetrators of laissez faire capitalism ...supported whole heartedly until now by Libertarian Economists of all color ... is a dismal sign of the fall and decline of US plutocracy.

You know, without malise, I've been pounding on consequences of deregulated banking sector and its moral hazard. So, welcome to the Club. But don't try to throw the baby with the bathwater now...that would be a even more dastardly coward and disengenuous intellectual reaction. What's required is a very, very deliberate discourse on the ills of deregulation and its socalled moral hazard.

In my humble opinion, the entire trick now is to get Fed to become the final authority and implementor of regulatory controls on hi fi sector including mortgages and whatnots.

The Cabal which perpetrated this contagion must be identified and punished, as an example, for other's. Unlike AG, I feel BB is morally a diffferent kettle of fish...and consequently prepared to follow his intellectual intuition more than what we might ourselves consider appropriate. Yet, he is the only person who can fix this contagion and bring the hi fi sector under Fed control and may be even SEC may be forced under Feds umbrella, to be effective in its function.

[gordon]

"Currently, with all the financial turmoil, nobody is sure what [complicated financial instruments] are worth...".

I remember my father taking some trouble to explain to me that things are worth exactly what you can sell them for.

[evagrius]

It seems to me that the "Free Market" is free for some but others have to pay and pay and pay.

[anne]

Remember though how persistently regulation has been used to destroy regulation. When federal biologists are forbidden to mention polar bears, in writing, twice over, for fear of creating public sympathy and understanding of the possible effects of climate change, there is indeed regulation. There has been ideological regulation to destroy impartial or scientific or democratic awareness and regulation.

[ndd]

Well, Bush's reaction was totally predictable: bailouts for Wall Street billionaires, good; regulation, bad. Privatize gains, socialize losses.

I give Barney Frank lots of credit for floating these proposals now. Voters need to be given a chance to vote in November as to whether the current approach, or an approach like Frank's, will be the law in 2009. That is the best we can hop for.

[save_the_rustbelt]

For balance:

I started my career pre-Reagan, and hyper-regulation protected entrenched corporate interests from competition, especially from entrepreneurs.

Anyone remember when there was only one phone company, and your only option was to lease (forever) a black phone or a tan phone?

Be careful what you wish for. Moderation is good in all things.

[robertdfeinman]

STR:

The thing that ties all market failures together (whether monopolies, or under regulation) is that the underlying democratic processes are not working.

Every time we see such a situation it can be traced back to a lack of accountability to the public. One can start with the railroad and grain monopolies that led to the original Populist movement and end up with the present day where big money controls the political process in both parties.

Just as the original Populist movement, eventually, caused the first wave of regulation by Teddy Roosevelt, this second gilded age will also lead to another round of improved oversight.

Unfortunately these half measures never get to the heart of the matter, the wealthy and powerful still stay wealthy and powerful. The scraps thrown to the masses defuse the anger and business goes back to normal, with a bit of extra oversight.

What may be different this time is that the US can no longer exploit the rest of the world to compensate for its structural problems. Empires in decline are not pleasant places in which to live.

[ken melvin]

A very good synopsis.

[Organic George]

Excellent Post

[ken melvin]

Ronnie's thru GWB's non enforcement of laws and regulations, insufficient/not funding enforcement agencies, ... such is all very undemocratic, confirming the right's distaste for democracy.

[Real Person from the Real World]

What we need is regulation free from the influence of the companies that have to be regulated. But how do you do that, in a system that rewards those with the money to buy clout?

[dickeylee]

Yea rustbelt, I remember that that black phone cost $11.79/month. Now I've got AT&T, AGAIN, for $94/month. Great deal, for AT&T!

[hari]

The principal instrument used to promote financial derivatives, and as a consequence, overblown hedge funds, was leverage. Capital was never/seldom the instrument of their control. Control was leveraged by the Cabal which used the deregulated markets to introduce the contagion...The result is not only a dysfunctional hi fi leveraged derivatives market(s), but one outside the privy of Feds regulatory control (ie.BS).

Of course, Globalization was Clinton/Rubins historical and political incentive to establish US hegemonic control of global financial markets. Even if the global market condition lasted for a while, the writing was on the walls. Those of us who shouted and called for a review of trading principles underlying globalization were laughed at and shouted-down as intemperate...result was an acceleration of the demise of globalization.

Given the statutes governing Feds authority, it's imperative NOW to bring the entire gamut of deregulated hi fi markets under its control. Fed can est its won umbrella and control mechanism to administer the regulatory regime. [No oversight institution must be controlled by WH plutocrats or ideologues.] I like the provisions under Fed to allow it to create the type of multiple institutions, as required by law, to establish modern regulatory control of hi fi markets.

No more contagion to be allowed willy nilly by foolish regulatory authority under WH appointment and control.

[hari]

What happend to the commodity market, including gold and oil, last week is salutory! It implies Fed read the developments correctly and went after the culprits - mainly hedge funds - and demolished their leveraged positions in the market.

This is why I consider BB an intuitive intellectual - once he grasped the contagion in the market - he was prepared to wage war against leveraged and deregulated market makers such as hedge funds and their like.

What's driving Hedge Funds? GREED!!!! Nothing else, as I can find over the years. BS was killed because of its greed.... Other's will now come to understand the long arm of Feds intervention in the market place.

The most important ideological problem now to get rid off is the established esteem of greed in the market place, and specially within the unregulated/leveraged derivatives market.

They're NOT a "shadow banking" institution, even if they tend to use the same instruments. Deregulation allowed them to takeover the derivatives market and to leverage it to n-scale! This is the contagion which must be stopped, and now.

[johnchx]

Mark Thoma writes: Regulations can make markets work better, so it's not clear to me why those who believe in the power of markets have such a knee jerk reaction against any kind of regulatory oversight.Because, among policy-makers (as opposed to analysts and academics), belief in the "power of markets" is largely pretextual. It is nothing more than what convention requires one to say when creating a lucrative regulatory loophole for one's favored clients/sponsors.

Politically, there is no support for markets per se because in well-functioning markets, nobody "wins": everyone is constrained by intense competition, and nobody enjoys competition.

The argument in favor of markets is simply a trade-off: I'm willing to endure competition myself if, in exchange, those I buy from are subject to competition. But what we really want is protection for ourselves and competition for everyone else. And the result is a political hodgepodge: protection for the strong and influential, competition for the weak and voiceless.

Happy Easter.

[Bruce Wilder]

MT: "it's not clear to me why those who believe in the power of markets have such a knee jerk reaction against any kind of regulatory oversight"

Fred Block: "these steps facilitated a dramatic shift of income..."

I saw P.J. O'Rourke on Bill Maher's program, and O'Rourke led with the libertarian trope, that my wealth doesn't make you poorer, it is not a zero-sum game . . . . I was disappointed that Barney Frank, also on the program, did not have a snappy comeback.

There are at least three tried-and-true methods for grabbing wealth, which are zero-sum games or even reduced-sum games. Externalizing costs is a favorite of Republicans, which is why many are adamantly opposed the effective regulation of pollution. Pay-to-play government contracting is another, which is why the Bush Administration is the most corrupt since Warren G. Harding, and the U.S. lost the war in Iraq, and never recovered New Orleans after Katrina.

The third is the manipulation of the distribution of risk. The distribution of risk and income is intimately related; change one, you change the other. So, sure, destroy the thrifts, the savings banks and savings and loans, and bring on the payday lenders. Destroy mutual life insurance. Destroy usury laws, and revise the bankruptcy laws. Go after corporate pensions. Go after Social Security. Reduce the scope of unemployment insurance. And, by all means, do everything you can to take home equity away from the middle classes.

[op]

what fronteer capitalism is all about

"As the rich grew wealthier, they invested growing amounts in hedge funds that pursued risky strategies to earn annual returns that were far higher than those available for ordinary investments... "

why blame this on reagan or carter for that matter
this bipartisan drive to incresae returns may manifest itself in a thousand disguises
enough in fact to fool even the vigilant
even unto one's own actions and aims

to look at the peel off regs
on old "civilized sectors "of hi fi
as the fronteer of hi fi boomed

robert 'bud 'rubin and his dereganomics ??

looks like cowboys on wall street
aren't alonre gents can play at this too
eh ??
what can you expect

call it TR rough riding
the genteeel tradition in muscular creative destruction

anne even her self
may have
at least
a side saddle mount in that hunt

[jamzo]

On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933.

and now hilary is running for the democratic nomination for president and phil gramm is jon mccain's economic advisor

by the way
to save_the_rustbelt

The break up of AT&T was initiated in 1974 by the U.S. Department of Justice antitrust suit against the telephone monopoly. Under the terms of a settlement finalized on January 8, 1982, "Ma Bell" agreed to divest its local exchange service operating companies, in return for a chance to go into the computer business, AT&T Computer Systems. Effective January 1, 1984, AT&T's local operations were split into seven independent Regional Holding Companies, also known as Regional Bell Operating Companies (RBOCs), or "Baby Bells". Afterwards, AT&T, reduced in value by approximately 70%, continued to operate all of its long-distance services, although in the ensuing years it lost portions of its market share to competitors such as MCI and Sprint.

the baby bells seem to have prospered in the new arena and still seem to have an extraordinary ability to influence regulators to favor their business strategies to the detriment of consumers

[Bruce Wilder]

I don't understand this enthusiasm for a single regulatory authority. The basic principle of classic monopoly, is that monopoly results in less of whatever good is to be produced. The Republican thesis of competing regulatory authorities competing to provide less regulation is a bald-faced lie. Policy coordination was aimed at reducing regulation; the Administration was very active in trying to stop State regulation. Why are we so stupid to buy into this recommendation for a single regulatory authority, when it comes from an eminently impeacheable source? Why?

[Bruce Wilder]

influence regulators, jamzo?

Verizon and the reconstituted AT&T have been actively and aggressively eliminating all regulation of their activities.

[doc]

It is well worth looking at The Pension Protection Act and the way which underwriters have gradually been given the greenlight to swap out assets from pensions and transfer them to hedge funds. The Depatment of Labor grants almost daily exemptions from proibited actions for underwriters that package and trade in derivatives -- making pensions, very unsafe! Thank Bush, and SIFMA.

[Bruce Wilder]

rdf: "Just as the original Populist movement, eventually, caused the first wave of regulation by Teddy Roosevelt, this second gilded age will also lead to another round of improved oversight."

Maybe, maybe not. I have serious doubts. The Gilded Age did not have Rush Limbaugh leading his ditto heads, or Bill O'Reilly.

And, a small quibble, Teddy Roosevelt rode the completely unexpected wave of Progressivism, which was philosophically quite different from Populism, and had a completely different social and economic class base.

The Populists were successfully marginalized in the elections of 1892 and especially 1896, as the Republicans under plutocrat Mark Hanna (Karl Rove's hero), assembled a presumptive political majority, which continued to hold sway until 1932. Woodrow Wilson, a Progressive Democrat, let some ex-Populists in thru a back door, but their time was over, their movement spent.

[donna]

Yeah, libertarian philosophy is great until you realize that there are too many stupid evil greedy bastards who can't be bothered to think of anyone but themselves. Most libertarians make the mistake of assuming that most people are reasonable and won't abuse the system.

As I am fond of telling my kids, "The rules are there for a reason - to protect you." Even when you think they shouldn't apply to you, because you're smarter or more special or just more talented than everyone else.

[robertdfeinman]

BW:
I see the Populists as having created a certain zeitgeist which had to do with the concentration of power and the concept that "the people" had certain rights.

That the political movement of this name was a failure, is true, but irrelevant. The appeals to fairness re-emerged as the "progressive" movement, but the motivations for change were the same.

It's like saying the Seneca Falls movement was a failure because women's suffrage didn't happen until a generation later. Right now I see the emerging awareness of the finiteness of the planet in a similar stage. The mainstream of politicians and economists are still promoting growth, but once an idea emerges it is hard to suppress.

That's why fundamentalist movements (of all types) spend so much time preventing their members from hearing contrary points of view. Some even make the effort explicit as shielding followers from contamination, blasphemy, sin or incorrect thought.

I don't think the genie of environmentalism can be put back in the bottle, however. There will be regulatory changes in the next few years. Whether they will go far enough is the real question.

[Bruce Wilder]

John Tepper: "competition in laxity and regulatory arbitrage seem good descriptions of what has occurred in financial markets since 1999"

Only if you are an idiot, an ignoramus or a propagandist for the plutocracy.

[Mace]

"Yeah, libertarian philosophy is great until you realize that there are too many stupid evil greedy bastards who can't be bothered to think of anyone but themselves."

Yeah, and not all of them are corporate types. I'd include government agencies, regulators, and the educational establishment.

[anne]

Doc:

"The Depatment of Labor grants almost daily exemptions from proibited actions for underwriters that package and trade in derivatives -- making pensions, very unsafe!"

Please add a specific reference when possible.

[paine]

"so it's not clear to me why those who believe in the power of markets have such a knee jerk reaction against any kind of regulatory oversight. "

mark

if you are making lots of money with no rules....
if you in fact are making more money ...with no rules

the bust may make good citizens out of these spirited profit animals

i suspect the more sober among our silk hat crowd
see among other points this key one:
to get the badly burned and panic-ed rubes
back to the poker table
they need to "legit" the play some

oh yes there will be the necessary gnashing of teeth
if for no other reason but to add their "fierce resistence "
to universal reg rigs
to the whole reform gigs main street cred

[save_the_rustbelt]

dickeylee:

I pay $94 a month for phone with unlimited long distance, broadband Internet and cable tv.

Do you really pay $94 for just a phone?

[prostratedragon]

STR must be a bit younger than I am, not to remember the boom in interior decorating that was touched off by the introduction of the tan phone.

Thanks, Mark Thoma, for pulling these articles together. It is indeed time to mobilize as much brain power as possible.

[anne]

There are problems, I do not understand how the Financial Modernization Act of 1999 lessened regulatory control of banks as opposed to strengthening the possible regulation of the financial system as combinations such as Citigroup were fully able to be controlled by the Federal Reserve. Then, I do not understand where the Comptroller of the Currency an the Securities and Exchange Commission have been since 2001.

Possibly the issue is not new regulation, but simply oversight and regulation to begin with. I am still not convinced the Modernization Act has been a problem.

[anne]

The question is whether the problem is a philosophy making for ignoring oversight and regulatory authority that grew as the Congress became more conservative culminating in a Republican Congress, and such a definitive philosophy through this conservative Presidency?

[paine]

bw

you take the hoffstooper line on the pop/ prog thang ..eh ??

why is it prog types
can't wait to kill off the pops
quick as they can

i guess its the pitch fork ignorance
and ass backwards of the pops

i agree
the class divide between pops and progs
is indeed the right starting point
but
the two " class movements "
both co-existed
thru several and various incarnations
and death row type org incarcerations
for at least 60 years or so
both twine -ing about each other
and spitting at each other
from maybe
the end of the first grant administration
to fdr's new deal

obviously i'm a deep pop guy

the progs pure progs that is
the wonky tonkys like fdr's brains trust
are a bit
of a dry stick crowd for my tastes

fightin bob lALA an all

Con trast his hairness
with say
the glory of huey long

the pop side's final big "yahooooo"
spit-in' and spite-in' prog salvation god FDR

rf has the spirit of the go down
between 1890 and the final burst
of reformation
under thru and over st woodrow

it was pop sweat and tears cocktailed
with prog policy gyros

the repug hegemony post the 96 "class showdown"
of course received important help from
these "timely " course corrections
progs "engineered "

herb hoover prolly figured he wasn't
all that far from a prog

imagine him thinking that about populism ???

[Bruce Wilder]

rdf: "It's like saying the Seneca Falls movement was a failure because women's suffrage didn't happen until a generation later."

a generation later??

The Seneca Falls Convention happened in 1848. The 19th Amendment was finally ratified in 1920. 70+ years.

Susan B. Anthony and Elizabeth Cady Stanton were born around 1820 or before. Carrie Chapman Catt was born around 1860, and Alice Paul and Lucy Burns around 1880 or later.

But, my larger point is that populism and progressivism represent intertwined but separate political and social movements in U.S. history, with different political fates and tendencies, as well as different philosophical and sociological bases. Both have long histories.

Progressivism did draw from an antebellum movement in favor of women's rights, abolition, and temperance, which, in turn, had its roots in New England religious awakening of conscience.

The Populists had their antebellum ancestors among the Know-Nothings and the supporters of Jacksonian Democracy.

It is complicated, but one thing I am pretty sure of, is that Teddy Roosevelt was no Populist, even if he, and the other Progressive Woodrow Wilson, did seek the support of former Populists.

[paine]

"don't understand this enthusiasm for a single regulatory authority"

i share your gut re action

if the congo in 09 creates a new super reg harness and places it effectively beyond the reach of the people
and their congress ..... like the present fed or supreme court

well .....here we go again

waiting for king kong to burst his new
unescapable hand cuffs

secretly unlocked by the independent super reg

[save_the_rustbelt]

I been involved in a seminar on auditing issues, and the question arose;

Why didn't Sarbanes-Oxley stop this problem?

Our conclusions:

Financial market events are moving too fast for generally accepted accounting principles to be useful.

Financial market events are moving too fast for generally accepted auditing standards and traditional auditing practices to be useful.

So, the question is not only how much regulation, but what kind, specifically what kind of regulation will work without constipating the markets.

We need to remember, anything that can be done on Wall Street can also be done in Hong Kong and London.

[paine]

bruce
nice fill in
one thing I am pretty sure of, is that Teddy Roosevelt was no Populist, even if he, and the other Progressive Woodrow Wilson, did seek the support of former Populists

yup u got dat straight

wilson was a gold dem brake away guy in 96

as to tr ...well
the less thought
of any sort
or on any subject
squandered over that ...parlor tarzan
the better

[paine]

Financial market events are moving too fast for generally accepted accounting principles to be useful

yup

its like expecting
a high school latin teacher
to become julius ceasar

[Bruce Wilder]

Herbert Hoover did think himself a Progressive. A Progressive in the Bull Moose tradition of George W. Perkins, more than Gifford Pinchot, to be sure, but, still well within the Progressive tradition.

John McCain thinks himself the second coming of TR.

Republicans before FDR were careful to co-opt the Progressives. The big lesson of New Deal politics for the plutocracy was the importance of co-opting the Populists, instead. That's why Lou Dobbs and Bill O'Reilly get the big bucks.

Progressivism has been re-furbished, by the plutocrats, as neo-liberalism, and deliberately injected into academia and the Democratic Party as a slow poison. The neo-liberals dutifully wring their hands over "increasing income inequality", but can be counted on to frame the policy problem in politically self-defeating ways: in vapid, repugnant tax-and-transfer terms, in passive regulatory capture diagnoses where no one is to blame and nothing can be done, in a general refusal to acknowledge the on-going class war, and, of course, an always reliably pious, but impotent view of trade and the problems of the "losers".

The Left needs a more effective language and imagery of villiany, and some policy proposals to back it up. The current crop of Republicans is certainly well-suited to the roles.

But, the capture of what would be the populist electoral base by the plutocratic right combines with the learned helplessness of the neo-liberal heirs of progressivism in a very unhopeful way.

[hari]

Bruce Wilder sounds to me like a Flying Dutchman!

From a regulatory policy perspective Fed can now get closer to defining the problem which created the credit crunch, and consider steps it needs to take to get hold of the derivatives market wholesale, if required, for transparency. Reason for that is simple: Fed would want to know exactly how it was manipulated into this mess by the leveraged derivatives market, including hedge funds.

Congress has legislative oversight on Fed and its operations. So there's no reason to doubt Feds cooperation with Congress to find how to go forward now in this age of globalization.

The objective now is to understand the critical financial mess created by highly leveraged unregulated derivatives market - operating as if it was (God) GREED all over!

If that results in putting a bridle or collar around the exisiting regulatory institutions, so Fed can establish its own priorities and perspective required to (more or less) slow down the market operations in order to get control of its eithical and moral hazard - always a delicate balance in such a diverse and huge capital market.

P.S. Let me remind you what happend last summer, in Germany, during the G-8 meeting. Merkel wanted to regulate the Hedge Funds operations inside EU. GWB and Blair said, nothing doing! If Fed and ECB can cooperate on regulating Hedge Funds, I suspect we'd be finally moving in the right direction....

[Bruce Wilder]

str: "Financial market events are moving too fast for generally accepted auditing standards and traditional auditing practices to be useful."

A polite way of way of saying that the horses left the barn, the corral gate was left open, and then the barn was torched.

Sarbanes-Oxley was a desperate attempt to repair the damage done, when auditors lost their professional independence from management. It has worked very well, as well as it could be expected to work.

But, when the FASB and the SEC decided that they would look the other way as the "shadow banking system" was created, that was an unrepairable breach. SIVs should never been allowed to slip outside consolidation; there's no logic to support that in a hundred years of accounting practice -- calling it "innovation" was always just corrupt bullshit, and it is still corrupt bullshit.

The accountants had plenty of time to figure out derivatives, but the good guys have been stymied at every turn for nearly twenty years. And, now Steve Forbes is blaming "mark-to-market" rules.

[kthomas]

Thanx for the post, Prof. Thoma.

It's been a while since I read anything from Block, let alone any other Davis Aggie. (What do they know anyways?, I ask. Stick to farming and animal husbandry.)

and paine...wow: "....96 "class showdown"

Was that new material? Well done. In actuality, I thought it was in '92. You, as always, enlighten me so.

[Bruce Wilder]

I would think it fairly obvious that the derivatives market needs a trustworthy clearinghouse. Sponsoring or even operating such a registry/clearinghouse operation is a logical extension of the Fed's role.

[Mark Thoma]

On a single regulatory authority:
Why Choose a Texas State Bank Charter?

[Bruce Wilder]

str: "We need to remember, anything that can be done on Wall Street can also be done in Hong Kong and London."

I would think Abu Dhabi would be the logical refuge for some the more exciting financial innovation of the 21st century.

The devastation of the rustbelt has been the price paid for New York's prosperity as a world financial capital. If New York's financial supremacy is lost, because standards of honesty and fairness are again imposed, that's probably all to the good.

[Bruce Wilder]

Why Choose a Texas State Bank Charter?

It is possible to limit jurisdiction shopping, without eliminating redundancy.

Competition to the lowest common denominator only occurs when competition is structured to lead to the lowest common denominator.

We could allow State usury laws to apply, based on the residence of the credit card customer, for example. But, we don't. Instead, we all get to enjoy the "protection" of South Dakota law, instead of the law of the State where we actually live.

My own preference for bank regulation would be to maintain at least two overlapping systems of oversight, and to maintain at least one of those systems in a de-centralized form, with lots of local influence. Banks, and how they operate, have a big impact on local communities. I would like to see banks subject to local oversight and community influence, through at least one of the regulatory schemes.

I recognize that banking is a vast industry, and important aspects of banking are national and international in scope, and regulation ought to take that into account. But, I don't think that's all that should be taken into account.

Moreover, banking is an industry in which there are substantial and well-demonstrated diseconomies of scale. A single, regulatory monolith could very well become a facilitator for the creation of a handful of giant, national banks (like Citigroup), with a significant attendant loss of efficiency.

[hari]

Yes! Abu Dhabi has already attracted my investment bank from Holland and many more because of their laxed regulatory control and, of course, no taxes.

It's not unlikely that if EU can find tax policy and other external constraints with such offshore financial operations by EU investment houses and other's, they will surely want to discuss with Abu Dhabi authorities on bilateral basis.

[hari]

Mark -

Thanks for putting up such a collective piece on the same issue. Very salutory and useful for us to arrive at some reasonable understanding on the state-of-affairs in hi fi.

Next - we need a concise brief on ethics and morality in public finance.

Greed is fine (for some) as long as the ordinary citizen's bank doesn't collapse with his/her family savings - whatnots.
The negative propaganda from credit crunch and recession underway is not good for the citizen who is not conversant in what's going on in Wall Street. What's good for NY is not necesarily good for rust-belt either...so problems are boiling out of this financial mess and Fed will not be able to rescue its own image without some serious interventions on the policy front, me thinks.

[anne]

http://matthewyglesias.theatlantic.com/archives/2008/03/let_there_be_regulations.php

March 23, 2008

Let There Be Regulations
By Matthew Yglesias

It took so long into this New York Times story * about congressional efforts to bring some regulatory oversight to the unregulated elements of Wall Street that it actually brought a smile to my face when we finally arrived at the inevitable "But industry groups warn..." part of the article. After all, I was curious, what will industry groups warn? What dire menace would it propose to the Republic if financial institutions that get bailed out like banks when they go bust, and now get access to the discount window like banks, also get regulated like banks before they do things that could force the government to step in and clean the mess? What should a politician eager to the bidding of firms who've bribed him pretend to be worried about?

The answer is: But industry groups warn that heavy-handed regulation could dry up investment capital just when the economy needs it most.

Because, of course, had new regulations been proposed 18 months ago, industry groups would have leapt at the chance. But now's not the right time!

* http://www.nytimes.com/2008/03/23/business/23regulate.html

[hari]

Anne -

Excellent piece!

[Winslow R.]

hari wrote: "Yes! Abu Dhabi has already attracted my investment bank from Holland and many more because of their laxed regulatory control and, of course, no taxes."

I sense the excitement.

Another reason to make currency creation a fundamental part of citizenship. There is NO need to give fundamental rights of citizenship to international/national/state corporate entities. Giving corporations this right is, once again being proven, destabilizing.

[Winslow R.]

This proposal is a strawman and will not resolve the issue.

Regulation of a corporation, that cannot be held accountable in proportion to its crime, is an impossible task.

If a bank can make $90 million by commiting a crime, why would economists propose a punishment for that crime of $10 million as that is all the capital they have at risk?

[kthomas]

Ouch, Winslow, you are so cold. You strike deeper than deep. My inner Ben Frankling adores your mark on regulation. Ouch. Get the gun powder and muskettes.

You've the gift for attacking and supporting at the same time.

[Bruce Wilder]

WR: "If a bank can make $90 million by commiting a crime, why would economists propose a punishment for that crime of $10 million as that is all the capital they have at risk?"

Indeed, "take the money and run" is what effective regulation must guard against, if regulation is to be effective. The policeman has to be in a position to spot the $90 million before it walks out the door.

[Winslow R.]

Thanks!

With nonbank/off balance sheet lending, the numbers are much higher.

'Policeman' have an impossible task finding that optimal position given the ability of international corporations to move across national boundaries where national enforcement officials have no jurisdiction.

[Winslow R.]

Mark is proposing? inadvertently? a 'one world government' as that is the only agency that would be capable of the task.

That economists propose such a solution, comes as no surprise, that Mark would endorse? such a policy does.

[paine]

"Regulation of a corporation, that cannot be held accountable in proportion to its crime, is an impossible task."

very profound winny

[Jim Harrison]

An unpopular thought on a website called "Economist's View," but the problems we face aren't really economic at root. We simply don't have the robust public institutions it would require to realize the benefits available in theory from the expansion of market mechanisms. The problem is political and cultural.

Granted the current state of our political system, any deregulation will simply benefit politically connected groups while screwing everybody else. Unfortunately, reregulation is also problematic so long as the justice system, the courts, and the press are all thoroughly corrupt.

[baileyman]

"Real estate bubbles have burst before, without bringing such trouble to the financial system. What is distinctive today is the drying up of market liquidity"

Note to the misleaders: Put the whopper right up front, then if they get past that, you're good for anything else you want to say.

[ken melvin]

"Regulation of a corporation, that cannot be held accountable in proportion to its crime, is an impossible task."

Pull their license to operate and prohibit any of the officers from serving in corporate capacity for a period commensurate the crime committed.

[Rainbolt]

It's high time that regulation be effective. The blogger, Karl Denninger is calling for a petition to review the case of the JP Morgan and Bear Stearns which would not preclude asking Congress to consider Impeachment if deemed necessary.

Please review--it's very compelling:

http://market-ticker.denninger.net/2008/03/articles-of-impeachment-bear-stearns.html

[James Killus]

I believe that many people here are groping at the correct answer, and probably have said it indirectly, but I'll try to say it directly.

It is not possible to create a system, legal, regulatory, political, or whatever, that can surmount concerted criminality from those in positions of power. When the lawmaker, cop, lawyer, and judge are all criminals, it doesn't matter how good your laws, criminality is what will result.

What is called "The Conservative Movement" is a form of organized crime, and it has taken over large components of government, corporate governance, finance and banking, the communications media, and society in general. Until these elements are stripped of their flag-pinned suits and have them replaced with prison stripes, this situation will continue.

The current financial meltdown is the result of fraud, plain and obvious in many cases. One may extend this analysis to practically every other part of American governance. These folks need to do jail time, and all their money should be forfeit. That this is unlikely to happen, or that it is difficult, or even that it is impossible to do in entirety, should not stop the demands that it be done.

[wjd123]

How many of us would screw the hell out of society in order to become rich? If your hand is raised, you're a sociopath. If you don't understand the question, you're an enabler.

Aren't CEOs screwing society when they fudge earnings to increase the value of their stock options? Aren't hedge fund managers screwing society when they leverage bets with other people's money on wagers that are safe until the long-shot comes in? Their take up front means they can't lose, only we can lose. When these schemes come tumbling down and bring on a financial crisis the crisis isn't just for the people involved in the schemes but for all of society. They've damaged a system we all depend on.

In an earlier era we might have consigned them to some circle of hell and put them in fear of the hereafter. Today the hereafter isn't what it use to be. And since most of their schemes aren't regulated or a violation of law, even the fear of earthly prison has been lost in today's world. Their day of reckoning can never come, only ours.

Oh, the occasional CEO is thrown in prison. It's cathartic, but not for enough people. Too many people see them as role models that got caught. They feel for them as they boo-hoo their way to prison explaining how they lost the better part of their personal fortunes, losing billions and only able to keep millions.

Instead of being labeled sociopaths these CEOs become prison celebrities. Instead of being confined to some circle of prison where they are no longer permitted to have any contact with the outside world their voices are permitted to be heard. They can only encourage others to get fat surreptitiously at societies expense.

Yes, the enablers are amongst us, ready for the opportunity to make their mark as full blown sociopaths once they have power. Enablers come in two varieties the clued-in and the clueless. You can see the enablers every day on shows that cover finance. The clued-in know why they are there, to shill for a deregulated system The clueless only feel that shilling for a deregulated system is their job.

Enablers are not hard to recognize. You'll find them today ringing their hands and worrying that we will over regulate the financial industry. They don't want us to kill the goose that laid the golden egg. It matter for the rest of us that the goose is a crazed sociopath and the golden egg is produced at societies expense but not for them. Clued-in or clueless they are enablers.

Some of these enablers are just amoral others are ethically challenged. However, some also suffer from a mental defect after being in the business of enabling too long. It effects their minds as surely as coal dust effects the lungs of miners. These long time enablers can no longer grasp reality. They are easily spotted after they get finance shows of their own in which they spend most of their time ranting.

So what have we learned? In a capitalistic society too many of us don't understand the question about screwing society. The social bias is there and a rewards system is there to nurture or encourage the sociopath. Sociopaths at the top seldom see themselves as sociopaths but as victims. We don't know how many sociopath running capital markets it takes to bring the system crashing down along with society since just one sociopath running a large enough company can start a domino effect.

Therefore what is called for is regulators over everyone's shoulder along with zero tolerance of cheaters at the top. This is necessary to balance the cultural bias in society and the rationalizations of sociopaths. In this environment of bias and rationalizations, beware of anyone expressing concern about over regulating our financial system. The safety of society comes first.

What can we do about the situation. First don't vote for any Republicans. They don't believe in regulations; they are ideological enablers. The more we can clear them out of government the higher the survival chances for society. Second, don't vote for McCain. The surest way to have someone who doesn't believe in regulations put in charge of a regulatory agency is to elect a Republican. Haven't we seen enough of what Republicans running government can do to society. This isn't an endorsement for Democrats but a rightful condemnation of Republicans. Clear out the known enablers first.

No one should be free to screw the hell out of society in order to get rich.

[James Killus]

Just a final thought: one might also consider the current circumstances to be merely another example of "the market in action" in the same way that a plane crash can be considered "gravity in action." And really, who can be said to be the culprit when gravity is involved?

[dale]

I'd love to see a more prolonged discussion of corporate personhood. I'm one who has tended to downplay its significance in the face of colleagues who are way into the issue, especially because it seems peculiar to the US and the pathologies of industrial society tend not to be unique to us.

[Winslow R.]

James wrote: "I believe that many people here are groping at the correct answer, and probably have said it indirectly, but I'll try to say it directly....."

While I don't disagree with the direction of your comment, you must ask what got us here?

The current corruption has a core from which it derived power and that power was control of money creation.

The control of money creation by international corporate banking has given disportionate control to a small (perhaps foreign?) minority. What is corruption after all? Isn't it just the will of a minority subverting the will of the majority?

Place the 'minority' in prison stripes and the potential corruption problem will not be solved as money creation is still in the hands of a minority.

To solve the corruption 'problem' requires placing money creation in the hands of the majority.

Universal citizen access to the TAF until proven 'corrupt'.

[Bruce Wilder]

JK: "one might also consider the current circumstances to be merely another example of 'the market in action' in the same way that a plane crash can be considered 'gravity in action.' And really, who can be said to be the culprit when gravity is involved?"

Years ago, I was doing a little work for the FAA. After I had blubbered on for too with some best forgotten analysis, an FAA veteran fix his gaze on me, and asked, "You do understand the central feature of our regulatory scheme, around which all else is built?" "What's that?" I said innocently.

"We require the pilot to be on the plane."

[STS]

Bruce Wilder:

"We require the pilot to be on the plane."

Hence the need for a golden "parachute" when the CEO pilot crashes the "plane". How else would he avoid accountability?