Friday, October 10, 2008

Don't blame deregulation

I guess because what's been gnawing at me the past few weeks is all this talk about how deregulation was at fault for the financial mess. How many times has it been said? And yet, what laws were changed that led to today's problems? The Gramm-Leach-Bliley Act of 1999 is the only one recently that I know of that may have played some role in the current crisis. (And, I know about the Commodity Futures Modernization Act of 2000, but I haven't been able to pin down what, if any, part it may have played.)

Sebastian Mallaby of the Washington Post points the finger elsewhere - to the Federal Reserve.
So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that.

… Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn't been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part -- though they are now vulnerable to the broader credit crunch because they operate with borrowed money.
This gets to the crux of what's been bothering me. I kept reading/hearing about the deregulation (usually the word 'Republicans' appears near-by), but if you're going to blame deregulation, what regulations were rescinded that shouldn't have been?

If, however, the Fed is the source of this problem doesn't that make you wonder if Ben Bernanke is the right man to be leading the charge now?

Mallaby continues:
If that doesn't convince you that deregulation is the wrong scapegoat, consider this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris calculates that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers. There's a vigorous argument about whether Calomiris's number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.
There was no lack of regulation, but there may have been a lack of oversight or, worse, the wrong emphasis among the regulators. You've got to identify the problem correctly before you can correct it.