So the left wants me to admit that the current meltdown means that we need oodles more financial regulation, and maybe the death penalty for being a rich idiot. The right wants me to admit that if we don't allow warrantless wiretapping, it will be harder to catch terrorists.
In the case of the latter, I concede that possibly they are right, as I am certainly no expert. But the purpose of catching terrorists is to make Americans better off. I am suspicious of the notion that we make Americans better off by giving the government broader spying powers.
In the case of the former, I also concede that a regulator might have prevented this--though take a long, hard look at government pension funds and their penchant for taking fliers in the derivatives market before you posit an all-wise regulator. But the regulator that would have stopped this would almost certainly have done so by being very, very conservative about new transactions--which would have stopped this, and a lot of things we like, like higher economic growth. There is no free lunch in regulation.
These two things are essentially flip sides of the same coin for me. Government powers come only at enormous cost: to liberty, to community, to the economy, and of course, the financial burden of paying for them. In some cases they are necessary. But pointing to a problem and noting that it exists is not an automatic warrant for me to smash it with the hammer of the state.
But, but, but...
Think Of The Children!!!
In the case of the latter, I concede that possibly they are right, as I am certainly no expert.
...
In the case of the former, I also concede...
What makes you an expert on the former?
You've said that before, about something (everything?) else. But if no one else has a hammer that can do the job, who but the state?
And speaking of "the community," why shouldn't the "financial burden" be shared equitably, through fair taxation, & perhaps confiscation of ill-gotten gains? Or should the saps who buy into "investing" & "economic growth" (When, exactly, does that stop? When the entire planet is paved over w/ parking lots so no one need walk more than 20 feet to enter a Wal-Mart?) be forced to pay for it all? Either way is fine w/ me; I make no "investments," nor do I expect a hot run at the tables in Vegas to allow me to continue my low-inmpact existence.
I'm not sure what your interlocutors are suggesting exactly, but there are many possibilities between smashing problems with state hammers and the unregulated mess we find ourselves in now. Surely you'd agree that there exists a theoretical tradeoff point between prosperity and regulation which is preferable to the situation we're in today.
This is a totally agreeable argument, the existence of a problem does not automatically call for an interventionist solution. However, in this case your assessment of regulation presumes that its purpose would be to forestall risky investment vehicles, which would have a negative cost to the economy. This may be true and would require some real cost-benefit analysis. But I think that's only one small part of the real regulatory problem: transparency.
The real issue that this crisis (and several other major economic and business debacles of the last ten years) brings to the fore is that our financial network has become something of a Rube Goldberg machine. In this case, low-grade loans and investments were marked as AAA quality because of the bizarreness of the system (and desire for profitability). Derivatives have become so complex that it's increasingly difficult to understand their relationships in the market. More often than not, instead aggregating risk they hide risk. This can lead to a market boom, because more deals get made, but when the market turns sour it hits us much harder. I think regulatory bodies clearly have an obligation to work towards a greater transparency, which could only serve to boon a real, free and fair market system.
I will say one thing about governement regulation and oversight. If you have a institution (or a class of interlocking transactions) that is so central to the financial markets that the fed needs to bail them out to save a global meltdown, maybe regulation isn't such a bad thing?
The existing regulators, especially the Fed, have been disasterous incompetents. I recommend a look at Company Law, with a view to increasing the powers of shareholders versus Directors and executives. The looting of companies by their executives has brought us to this point, and the regulators have proved to be as much use as chocolate teapots.
A truly free financial market would deal with issues like what is happening today by letting the losers lose and letting the prudent prosper. This is the necessary discipline required to enforce responsible behavior in all manner of transactions. Such a system would never allow irresponsibly risky behavior to spread so far and wide to threaten the whole financial system. However, once the state is involved, the losses are socialized. This is implicitly understood by everyone, so the inherent risks in lending always seem to everyone to be less than they really are. One is a moron to not know where such large moral hazard leads- it leads to system-wide folly.
What you are seeing today is the direct result of the central bank policies in place for over 20 years. I am beginning to worry that we are on the cusp of the collapse of the financial system.
I'm willing to compromise. You don't need to admit we need more financial regulation.
Jonathon:
In this case, low-grade loans and investments were marked as AAA quality because of the bizarreness of the system (and desire for profitability). Derivatives have become so complex that it's increasingly difficult to understand their relationships in the market. More often than not, instead aggregating risk they hide risk.
But the complexity is in theory what allows the risk to be decreased, right? So you can't have the one without the other.
I think regulatory bodies clearly have an obligation to work towards a greater transparency, which could only serve to boon a real, free and fair market system.
If the additional complexity is where you're getting your ability to better assess risk, and people with normal brains can't understand the complexity, then will transparency help you?
I can see two possibilities:
1) The risk aggregators really thought they had reduced the risk via their incredible bulging brains
2) The risk aggregators were actually using their bulging brains to convince other people with less bulging brains that they had reduced the risk without actually doing so.
1) is hubris and 2) is fraud, and both seem pretty likely to me. It's not such a big step from hubris to fraud anyway.
It's a truely versatile imagination that can concieve of a modern community (I s'pose you meant a national community) without active government intervention but cannot think of any regulation except as a hammer. Very sad for you.
Your opinion seems to weigh more heavily on an admittedly anti-government, anti-regulation perspective than it does attention to any sort of facts. You seem to assume that regulation can only come in one form and that's tough and bad, but even more conservative, common-sense anti-predatory regulation would have cost the nation and the economy a mess of volatility. What kinds of scenarios do you envision when you discuss regulations? What, exactly, would have been the costs and how is this analysis done (i.e. under what assumptions)? Furthermore, how come it's okay for the Fed to step in with public money and lower interest rates at the risk of big banks defaulting and inflation increasing? The losers should lose, the economy should move on, and the government should stay out of it. Is that what happens? How much of this mess will taxpayers end up subsidizing? There has been nothing better for financial institutions with little regulation, little oversight, and little transparency than a U.S. government willing to back them with money and save them when they scream for it.
Warren Buffett always says, people control markets and they are hardly if ever rational.
In many types of accidents the person(s) responsible is liable not only for damages but also faces potential legal liability for negligence. Driving too fast, for instance, and causing a car accident. Or in the case of driving drunk, possible criminal negligence.
Or take the crane that just collapsed in midtown Manhattan. The crane manufacturer, renter (assuming it was rented) and the construction company all face possible legal charges, and depending on the circumstances, that could include some form of negligence.
Why should those responsible for the potential impending financial disaster be excused from legal liability? Stupidity, incompetence and carelessness are not generally winning defenses from liability charges in other areas of life, why should they be in business and finance?
Somehow regulations are worse than what we are facing now? Yeah those scary regulations are better than going right to the brink of destroying modern capitalism and having the hardworking U.S. population bail out investment banks to the tune of a trillion dollars.
Megan you might be interested in how the UK made a total mess of our own Bears Stern through over-regulation--they had three bodies responsible. This documentary How Banks Bet your Money shows how various bankers were spelling the problems for the regulators and they still didn't get it--indeed the public were sharper. The documentary is hilarious but if you don't have time to watch it there is a summary of sorts.
Anyone ever look at Fannies' balance sheet? The government can do no good here.
But the regulator that would have stopped this would almost certainly have done so by being very, very conservative about new transactions--which would have stopped this, and a lot of things we like, like higher economic growth.
Well, you're going to have to wait until the coming recession is over, and then make some kind of case that growth through the entire business cycle would have been lower if not for the SIVs and ARMs that got us into this mess. And that's far from self-evident. There's also a question of what kind of growth that growth was. Growth from building out exurban housing developments it turns out no one really wants isn't an unalloyed good. In fact it's not a good at all.
Once the bailout of a big chunk of the financial system gets going, what you're really talking about here is taxpayers subsidizing lenders to spend 8 years pumping up the exurban housing market. If you're going to have government throwing hundreds of billions of dollars into the economy, I can think of better things to spend it on than extending urban sprawl in California.
Another day, another piece of illiterate libertarianism from McArdle. God above, surely the Atlantic could find someone who knows a little about politics and economics? If you want token wingnuttery, you have the posturing Republican blowhard Douthat, with the ambiguous Ambinder and the well-meaning but syntactically challenged Yglesias. Is it so hard to find one writer capable of analysing this topic in a mature way that doesn't resemble an inane freshman essay?
I have to agree with you on the crazy talk on the right. Years ago I would have thought that the US government would never dare to openly torture people or hold US citizens without trial. What a difference an attack on the motherland makes.
People never learn it seems. There is a very slippery slope once you let loose the inquisition. You would think that people would remember the old "first they came for the....etc" but I guess fear is a powerful weapon against civil liberties.
As to the regulation thing, I would think that rather than worrying about the opinions of those you don't agree with, Libertarians would be doing a little soul searching or maybe even actual research into how their beloved markets put them in this place. I am sure that with a little work you can convince yourself that it is all the result of too much current regulation...if only the man would let those markets be really free, none of this would be happening.
Megan,
Don't assume that most folks on the Left even understand how involved government was in the real estate boom and bust in the first place. Perhaps a post on how the government essentially created and stoked the secondary market for mortgages with the GSEs is warranted. You could also summarize the policies that both recent Dem and GOP administrations have implemented to increase home ownership levels, and how these led to marginal borrowers getting mortgages they couldn't afford.
Here's just one other li'l thing. The FDIC guarantees deposits in banks by law. The Federal Reserve is a lender of last resort to banks by charter. As a citizen and a taxpayer, as part of the social contract, I accede to these uses of government money and authority because they are written into the law which my elected representatives wrote.
But Bear Stearns isn't a bank, and the money it holds isn't a bank deposit. Yet the Federal Reserve is pumping in money to back JP Morgan's purchase of Bear Stearns and take over its obligations. Since when, as a citizen and taxpayer, did I accede to that? Since when did I agree to backstop every crazy transaction or contract made by a bunch of mathed-up lunatics on Wall Street with each other, regardless of regulations or laws? If I now go out and make some kind of collateralized debt obligation to my dog that involves the use of quantum physics and can't be solved without an organic DNA computer and that amounts to quadrillions of dollars, will the Fed step in to rescue me when I go bust, lest those quadrillions of assets I turn out not to possess send the international financial system tumbling? When did I or any other American citizen sign up for this guarantee?
Okay, you say, but the Fed just has to do this - otherwise we all suffer. Well, then, fine, let them do it. But it means the government is overstepping the authority I granted it to use my money and authority to bail out an institution I never agreed to backstop. So those institutions have no authority to whine about the conditions which I, citizen, plan to enforce on them and their ilk, to protect me from getting sucked into this crap again.
MB: "But if no one else has a hammer that can do the job, who but the state?"
Who says the state has such a hammer? Our problem is that today's problem doesn't look like a nail, or like the kind of problem we've faced in the past. We need a frangijam to solve this problem? Does the state have one?
"why shouldn't the "financial burden" be shared equitably, through fair taxation, & perhaps confiscation of ill-gotten gains?"
I think the Bear shareholders, many of whom work there, who have lost 99% of their investment over the last year, are taking their share of the burden, don't you?
Damir: "there are many possibilities between smashing problems with state hammers and the unregulated mess we find ourselves in now. Surely you'd agree that there exists a theoretical tradeoff point between prosperity and regulation which is preferable to the situation we're in today."
The tradeoff may exist. What Megan is implicitly asking for is that someone get specific about where to redraw the line. Moving it arbitrarily in the direction of regulation may fix nothing at all.
Jonathan: "our financial network has become something of a Rube Goldberg machine."
Its complexity is what allows our economy to grow faster: that is, to create the jobs and goodies we need. Can it be improved? Yes, and many of the changes in recent years are exactly such improvements. But none of them make it simpler.
"low-grade loans and investments were marked as AAA"
Everybody agrees that many vehicles were misrated and therefore mispriced. But what would regulators have done? Ban everything that they didn't understand?
"I think regulatory bodies clearly have an obligation to work towards a greater transparency, which could only serve to boon a real, free and fair market system."
Can't disagree, but what are the specifics? That's her challenge to would-be regulators.
dearieme: "The looting of companies by their executives has brought us to this point"
Those are the same execs whose term in office lasts a shorter and shorter time, because of investor impatience. Are you arguing for patience and/or tolerance of relatively poor results?
Yancey: "A truly free financial market would deal with issues like what is happening today by letting the losers lose and letting the prudent prosper."
That's what we've been doing and it led us here. Wall Street is claiming that overregulation led to today's problems...
BP: "It's not such a big step from hubris to fraud anyway."
There may have been fraud, but there are already laws against fraud. And of course, in some cases, the homeowner committed the fraud.
Daman: "You seem to assume that regulation can only come in one form and that's tough and bad"
Not what she said. She explicitly said she was ok with regulation, but doesn't see how it would have helped in this case.
"how come it's okay for the Fed to step in with public money and lower interest rates at the risk of big banks defaulting and inflation increasing?"
That's the Fed's whole job - to regulate the money supply by setting interest rates. Lowering rates doesn't push banks towards default; it makes it easier for them to borrow money (from the Fed)
Gene "Why should those responsible for the potential impending financial disaster be excused from legal liability?"
She isn't proposing that. They are exposed, and the courts will be full of cases as a result.
mickslam: "Somehow regulations are worse than what we are facing now?"
They could be. History is full of "too much too late" responses to problems. But she's not even rejecting the idea of regulation per se. She just wants them to make sense.
JoshK: "Anyone ever look at Fannies' balance sheet?"
Even the WSJ wants more regulation of those guys. Tighter controls were prevented by exactly the same folks now screaming for government intervention - Capitol Hill Dems.
brooksfoe: "Well, you're going to have to wait until the coming recession is over, and then make some kind of case that growth through the entire business cycle would have been lower if not for the SIVs and ARMs that got us into this mess."
The trouble is, nobody knew whether and which of those caused the problem. And none of them bears on the subprime mortgages that liberals insisted the banks issue to escape punishment for "redlining". We'll be paying for that "regulation" for a long time.
"taxpayers subsidizing lenders to spend 8 years pumping up the exurban housing market."
It sucks, and hopefully investors and foolish home buyers will pay a big chunk of the costs, but taxpayers are where the ultimate money is, if a bailout can't be avoided.
RobbL: "Libertarians would be doing a little soul searching or maybe even actual research into how their beloved markets put them in this place."
This post is about exactly such a search. She's claiming an open mind on regulation, but wants somebody to be specific about what to do. These comments offer nothing like that.
brooksfoe: "the Federal Reserve is pumping in money to back JP Morgan's purchase of Bear Stearns and take over its obligations. Since when, as a citizen and taxpayer, did I accede to that?"
It's just the kind of thing that regulators do! The free market approach say "let them go bust and let the chips fall where they may". And remember that Bear's owners took it in the shorts in the deal. The Fed put its finger in another hole in the dike. This was a probably a good call because their failure appears likely to have caused a giant cascade of other failures that could have brought the US economy and maybe the world economy to a dead stop. For better or worse, everything runs on borrowed money...
"When did I or any other American citizen sign up for this guarantee?"
The guarantee wasn't for any specific deal or company. It's to protect the system. And we did sign up for that.
"So those institutions have no authority to whine about the conditions which I, citizen, plan to enforce on them and their ilk, to protect me from getting sucked into this crap again."
True, but you're not stupid, so what conditions are you talking about? The modern economy only works because the folks who loan money and make deals get it right more often than not. They're "the smartest guy in the room". If we replace them with someone dumber (can you say "bureaucrat") we'll get - on average - worse results. Are you really ok with that?
There is no free lunch in regulation.
This is a faith-based belief. It adopts the a priori assumption that the constraints a free market imposes on market players always create a more efficient market than the constraints that governments impose.
There's a big difference between the seemingly magical efficiency whereby market constraints are self-imposed, and the efficiency of the resulting market.
Has the SEC resulted in more efficient markets?
And none of them bears on the subprime mortgages that liberals insisted the banks issue to escape punishment for "redlining".
Let's be very clear about this. This claim is tantamount to "the niggers did it".
The loans that are going bad are in lily-white suburbs way the hell out in California and Florida. Not in East Baltimore. The claim that government anti-redlining rules are to blame for the implosion of the real estate market is classic American racism in a nice clean wrapper.
brooksfoe
Interesting day to be calling me a racist.
Subprime loans are going down all over the place; exurbs, sure, but also East Baltimore and other debt-challenged areas. Anti-redlining regs catalyzed the growth of subprime, because too few borrowers in those areas could qualify under standard underwriting rules. And the now-infamous NINJA (no income no job) loans were concentrated in the poorest areas. Home ownership rates reached an all-time high (>67%) during this bubble. We won't see those numbers again soon.
I'm curious where you came by the idea that != == not =