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Financial links
1. Very good David Brooks column
2. What would the new RTC look like?
3. When will bank loans fall more?
4. Beating LeBron James at "HORSE"
5. Treasury will guarantee money market funds
Posted by Tyler Cowen on September 19, 2008 at 06:41 AM in Economics | Permalink
Comments
I don't know what's so good about the Brooks column. He's complaining that the problems weren't caused by insufficient regulation but it's not clear where the evidence for that is. Perhaps it depends what we mean by regulation. As I understand it the problem was:
1) Interest rates too low for too long (Fed's fault).
2) Allowing banks to make up crazy instruments for hiding risk (surely preventable through regulation).
3) Allowing banks to lend to people who clearly couldn't afford it (surely regulation could put a stop to that).
4) Willingness of foreigners to fund the insanity - which they only did because they though they had an implicit guarantee from the Fed - which they clearly did. (Fed's fault again).
5) Hedge funds making money by reating panic (could regulate the hedge funds?)
6) People being poor judges of their future wealth.
So aside from "6", which is a sad fact of human existence, all the other problems were either the Fed's fault or could have been reduced through sufficient oversight.
Posted by: Finnsense at Sep 19, 2008 7:29:49 AM
Does Mr. Brooks need to read Mr. Martin's My experience at IndyMac?
Posted by: odograph at Sep 19, 2008 7:42:45 AM
Which of the following requires a greater disincentive:
( a ) Holding a bank hostage
( b ) Holding a banking system hostage
Why is the disincentive for (b) a bail out while for (a) it is ususally a prison term? I am not an economist, nor do I know much of anything, but something seems awry.
Posted by: Intrigued at Sep 19, 2008 8:14:51 AM
Intrigued,
I think Woody Guthrie asked the same question:
"Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen."
Posted by: Bernard Yomtov at Sep 19, 2008 9:26:28 AM
Some insurance scheme for the money market funds was probably inevitable. Better to make it explicit, then.
I hope the Fed does more than just charge a premium. Otherwise we're going to see some strange investments by the funds.
Posted by: Bernard Yomtov at Sep 19, 2008 9:31:58 AM
David Brooks writes "It’s just that there’s a big difference between dreaming of some ideal regulatory regime and actually putting one into practice."
Brooks is an intellectual featherweight, and that comment sounds like cynicism worthy of George Will.
Yes, of course there's a difference between dreaming and doing. But regulation (and all rule of law) shouldn't be thrown out like the baby with the bathwater. Regulations and the enforcement thereof should be inextricably linked, but this kind of rhetoric (both Mr. Cowan's and Mr. Brooks') drives a wedge between the two. This is sophistry in the name of libertarian ideology.
Posted by: Dan at Sep 19, 2008 11:14:32 AM
I think there's a useful distinction to be made between 1) rectifying obvious negligence (laying off OTS examiners?) and criminal management (some or most mortgage lenders and brokers), 2) fixing structural problems that contributed to the current crisis (maybe things like increasing leverage allowances for investment banks), and 3) figuring out regulations that will preempt future crises. The first should be pretty straightforward, although perhaps politically difficult. We should all be pushing hard for that one. Clearly, a lot of lending laws were broken during the housing boom. The second is a little tougher but should be doable. However, a lot of the commentary being thrown around and acted on, like it all being the fault of short-sellers, is highly suspect. So we're already running into problems distinguishing between the right solution and any solution. And the third aspect is really the tough one. I don't think Brooks is saying let's not regulate, he's just cautioning that making regulation work as intended is tough, let alone avoiding rent seeking and unintended consequences.
Posted by: Greg at Sep 19, 2008 12:52:04 PM
Greg:
When you conclude by saying "making regulation work as intended is tough," I hear the cynicism that I ascribe to David Brooks.
I would respond by saying: yes it is tough. But that is a beginning, not an ending.
Maybe I need to read more Hayek, but I think that paternalism does not equal totalitarianism.
Posted by: Dan at Sep 19, 2008 2:13:59 PM
