"A lot of people had to make bad decisions for the crisis to happen. People had to buy houses they couldn't afford. Ratings agencies had to give AAA ratings to junk securities. Regulators had to be asleep at the wheel. The GSEs had to lower their standards and provide billions of dollars of government-backed financing for dicey home loans. Nobody is denying that all of those things played roles in the crisis.
But the main driving factor was the simple fact that banks were able to make trillions of dollars selling defective products. You take away that simple market-driven reality, there's no bubble and no crash, no matter what people like Michael Bloomberg say. No one is insisting that they take the whole rap -- but don't insult us by trying to say they shouldn't take any at all."
>But the main driving factor was the simple fact that banks were able to make trillions of dollars selling defective products. You take away that simple market-driven reality, there's no bubble and no crash
ReplyDelete...except that's not entirely true. You know all about the FED's manipulation of interest rates, and I bet you probably agree that when money is artificially cheap, malinvestment will inevitably occur in proportion to the cheapness of that money. If Glass-Steagall had still been in place - nay, if we could go back in time and regulate against every problem that led to the 2008 Financial Crisis, do you think that in such a scenario, there would have been no problem at all? I don't. My take on this is that the malinvestment would have simply manifested itself in another form, in another area, and though the crash may not have been as potentially catastrophic as it was, it wouldn't have been business as usual, either. Now add to the FED's constant manipulation of the money supply to artificially boost the economy the government's various schemes to boost home ownership, especially among the lower-middle and lower classes (who obviously have a greater chance of default), and I posit that there is no way that these things combined would NOT have led to a bubble and subsequent bust. As long as the government is distorting price signals in one way or another, the market will have a difficult time finding equilibrium, and these kinds of problems will continue to occur. The first problem with regulation is that it can only be applied in hindsight, but those regulations are just a band-aid. The analogy I like to use is that the economy is a balloon, the government/FED is the air supply, and regulations are a hand that's trying to keep the balloon from expanding. As long as the air keeps flowing in, it doesn't matter how tightly you grip the balloon or how you hold it - eventually, it will pop. People who blame what happened solely (or even mostly) on the markets fail to see the big picture.
I agree with you 100% on all points. I actually use the analogy of "finger in the dike;" you put your finger somewhere and water shoots out somewhere else. (Now that I say that, I realize how erotic that all sounds and will begin using your balloon analogy.)
ReplyDeleteI don't think regulation would stop anything and, well, believe that these guys will find any way around them or to make money.
Actually, I think that is true of ANY system; there will be people who find ways to get over on it, no matter what the safeguards are in place to try to keep them from doing so. I hate to say it, but it's human nature.
The government/Fed/regulators meddling in the markets cause this to happen. But, I dunno if in some instances, such as banks, that, in many ways, CANNOT be allowed to fail should be exempt.
Since their failure causes so much widespread pain for people that have nothing to do with the reason they're failing (say, depositors) and in areas that have nothing to do with their poor actions (say, credit markets freezing up), I don't think they can really be allowed to run wild.
They must, in the very least, be contained to only destroying themselves and their direct investors. I don't believe we can expect the common person to understand or know that the bank they have their savings/direct deposits/mortgages/retirement accounts/and life insurance plans in might be doing things that could cause them to lose the aforementioned things.
What are some ideas you have about addressing regulation; mainly in banking and mortgage industries.