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Tuesday, March 25, 2008

"An Absence of Oversight"

Robert Waldmann has more on bank regulation, and whether an erosion of the wall between banks and Wall Street helped to bring about the financial market crisis:

Paul Krugman Doesn't Need My Help, by Robert Waldmann: Paul Krugman doesn't need my help, but I think that Jonathan Taplin is being unfair here and is also unfamiliar with the evidence on banking regulation and banking crises.

He tells a tale of how after the Great Depression, Democrats worked to protect the banking system from runs, by enacting a split of Investment Banks and Commercial Banks.


But never once in the whole article does he point out who yielded to the enticements of Wall Street--who was responsible for destroying the Glass-Steagall separation of Banks and Investment Banks--Bill Clinton.

Krugman didn't mention the Glass-Steagall act in his column. ...

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. ...

[This also rebuts the update at the end of the post A Coordinated Effort to Destroy Effective Regulation.]

From comments:

There is reason to believe, I am again told with authority, that the problem in the financial markets has not been an absence of regulatory capability, but an absence of oversight and regulation that is part of the anti-regulatory philosophy that has steadily grown for 25 years but reached culmination with this Administration. ...

I think there's something to this. There is quite a bit of discretionary authority in the hands of regulators. As the philosophy of both parties has drifted toward a hands off approach over time, and as appointment after appointment to this or that agency has reflected that changing philosophy, the accompanying regulatory oversight has changed along with it. The changes have been more dramatic under Republican administrations, and the current administration strongly prefers a hands off approach on all matters involving economic policy (with the exception of tax cuts for the wealthy), so it's no surprise that the same philosophy has, over the last several years, filtered into the offices charged with regulatory oversight more so than in the past (and appointments based upon how much someone contributed and the strength of their ideology rather than their competence hasn't helped). To change all of this and reign in the excesses, it will take more than just changing the rules, it will also be necessary to change the people interpreting and enforcing the rules, and that won't happen without a change in party in control of the executive branch.

Robert's point is that we need to address the correct problems, and pointing fingers at the change in the Glass-Steagall act misses the mark, but once we understand where the problems are we also need the will to address them and it's hard to imagine that will existing under the continuation of this administration's economic philosophy that we would get with McCain. It's not that clear that the Democratic candidates have the will either, that was Paul Krugman's point, but at least there's some hope.

    Posted by on Tuesday, March 25, 2008 at 12:25 AM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (78)


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