Regulation is Evil
It is one of the great myths of the last quarter century that the so-called “Reagan revolution” heralded a dramatic increase in economic growth and living standards, and that this revolution was brought on by lowering taxes and scaling back regulation. But, as I said, this is a myth. It is a myth that appeals to those who believe in social contractarian laissez-faire liberalism, the notion that a good society is one that upholds individual self-interest and defines freedom along these lines. It ignores the fact that the common good may require taming the excesses of the free market. Nowhere is this more evident than with the fallout from the subprime mortgage crisis.
Paul Krugman summarizes the issue nicely.
“America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take.
Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions — the “shadow banking system,” which relied on complex financial arrangements to bypass those safety regulations.
Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And the government is rushing in to help, with hundreds of billions from the Federal Reserve, and hundreds of billions more from government-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don’t have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what’s happening now is the quid without the quo.
Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.”
For sure, the deregulation brought great wealth to a small number of people. This wealth was derived from financial chicanery, as mortgage originators made bad loans to people who could not really afford them, and then washed their hands by selling them off to investment banks, who packaged and re-packaged them, selling them on to other investors who had no idea what they were getting. This scheme worked while house prices kept rising, aided and abetted by Greenpan’s monetary policy. Wall Street got rich, and everybody clapped each other on the back about the brilliance of the unregulated financial system. Except that nothing of value was being produced in these transactions. Except that inequality skyrocketed as median incomes stagnated. In prior generations, these great disparities would have been frowned upon, but no longer– this was the Reagan revolution, after all. And when house prices started falling, and foreclosures started rising, the whole house of cards came tumbling down. And what happened? The very same “anti-government” ideologues came cap in hand for a government bailout.
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I think this passage of Bulgakov is interesting in light of this discussion; the problem is it is in the midst of a discussion of economics by viewing the thoughts of one economicist he appreciated, and so it is more of a summary of someone else’s thought than Bulgakov’s, but it makes the point too well not to add it to this discussion:
“Summing up Sombart’s characteristic views, we must once again note, that in this work, he is stating a practical position: ‘we have become wealthy because all the races and peoples apart from us have perished, all the other parts of the world have been depopulated, all other lands and cultures laid waste’ (De modern Kapitalismus I, 326 – 48). Such is the price of happiness for mankind, now and in the future.” Sergei Bulgakov, “The Economic Ideal,” in Sergei Bulgakov: Towards a Russian Political Thought. ed. Rowan Williams (Edinburgh: T&T Clark, 1999), 34.
In other words, people become wealthy often at the suffering of others. So certainly some policies can indeed bring “wealth” to some, but just focusing on them ignores the full story. So many forget this.
As someone who is more empirically minded, I’d like to know:
1) Exactly what deregulation do you think occurred? Citations please, to actual statutes or federal orders.
2) Exactly how did this deregulation cause the housing bubble and the inaccurate risk-assessment of mortgage-backed CDOs?
3) Exactly what regulation do you think would prevent this in the future? (Tread warily here; it’s very difficult to predict exactly how a new regulation would play out.)
The subprime mess is now Reagan’s fault?! And you’re lecturing us on myths?!
Deregulation brought wealth to a small number of people? Actually, I think lots of people got wealthy as the middle class was able to buy up houses with rising prices. But you are too harsh on them! What did Average Joe ever do to you that you have to rant against the middle class like that?
Can you explain how exactly the subprime market increased income inequality?
The problem with you pro-regulators is that you look at every failure of the free market in hindsight and assume that government could have prevented it proactively and in a manner that is more beneficial than detrimental to the common good. Today you believe that banks need government to regulate lending because apparently loss of immense sums of wealth by Wall Street is apparently not enough motivation for the industry to regulate itself. I may have missed it, but were you arguing for regulation of lending prior to the subprime meltdown?
It seems like you didn’t like Greenspan’s monetary policy either. What would you replace it with? Do you think Greenspan should have kept interest rates high during the dot-com deflation?
Also, MM, if you come up with an answer, try to be non-partisan. You might, for example, look into Clinton’s record here: http://tpmcafe.talkingpointsmemo.com/2008/03/22/paul_krugmans_hypocrisy/
Who is being partisan? When I use the term “Reagan revolution” I mean it as a catch-all terms for the prevalent philsoophy that regulation is bad, and that unfettered capitalism brings about the best outcomes. And yes, I’m well aware of Clinton’s record here.
In terms of regulation, the list is endless: (i) the lack of restrictions on how private institutions could take advantage of securitization (Fannie, Freddie, and Ginnie are regulated), especially since the mortgage originator has no incentive to monitor risk; (ii )the ability of banks and financial institutions to engage in regulatory arbitrage, using off-balance sheet vehicles to avoid the regulations imposed on banks, such as minimal capital and liquidity requirements, constraints on permissible assets and liabilities, reporting, governance requirements etc– how did regulators let them get away with these fly-by-night off balance sheet entities?; (iii) rating agencies that sell consulting services to the same client to whom they sell ratings.
Regulation would simply move to corect some of these problems.
As for Greenspan, he is partly responsible for inflating the housing bubble by keep rates too low for too long, and for cheerleading Wall Street instead of setting of alarm bells.
http://www.nypost.com/php/pfriendly/print.php?url=http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm
I’ve seen this firsthand…..
It’s the poor people’s fault may satisfy some quarters, but ignores fiduciary responsibilities and all those other unpleasantries. Fairness in lending didn’t cause people to make bad loans. Also, just so we are clear, one subprime executive defined subprime as those families making under $100,000/yr with less than $100,000 in assets.
For SBuck’s benefit, start with the repeal of Glass-Steagal (admittedly done under Clinton).
Trust Jonathan to bring in the race angle (I’m waiting to find out that the minorities took these loans because they are biologically less intelligent than white Texans…)
This was simple greed in the absence of regulation. If I make a loan to you, and I keep that loan on my books, it’s in my interest to make sure you can pay me back. But if I see the loan immediately, not only do I no longer care, but it’s actually in my interest to get the highest interest rate I can (often through duplicitous means). At the peak of the boom in 2006, 61 percent of these subprime mortgages went to people who could easily qualify for conventional loans based on credit and income criteria. And the game could continue as long as house prices kept rising, which they would as long as liquidity flooded the markets.
MM — that’s not a serious response to Liebowitz’s argument that lending standards were loosened not by wild-eyed Reaganites but also by liberals who had well-intentioned plans to provide home loans more readily to poor people. Leibowitz is certainly a more well-known economist than anyone around here (I’m familiar with his articles on path dependence and file-sharing), and he might be worth taking seriously. Is he wrong?
MM said:
“Trust Jonathan to bring in the race angle (I’m waiting to find out that the minorities took these loans because they are biologically less intelligent than white Texans…)”
We’ve already gotten an article from him arguing that there is ‘strong scientific evidence’ for female biological inferiority in matters scientific and mathematical. Maybe an increase in females as primary mortgage signers explains the phenomenon..
Uh, trust the usual suspects to look for racism or a “racial angle” at the drop of a hat.
Liebowitz is factually correct, and I don’t see how one can dispute that a loosening of lending standards wasn’t / isn’t a significant problem. Of course greed was / is a huge problem, exactly like changes to federal law.
And this “(I’m waiting to find out that the minorities took these loans because they are biologically less intelligent than white Texans…)” demonstrates that you have no intention to dialogue in good faith. But ain’t it grand to feel morally superior! No racism in me! But you crazy Texans…..! Whatever.
You want a debate? How many times have I tried to debunk your dubious racist literature that you hawk and peddle at every opportunity? How many? The issue is not this piece of evidence on its own merit (if it has any effect, it is decidedly minor). The issue is your seeing everything through race-tinged glasses, all the while saying that you think blacks happen to be less intelligent. Whatever indeed.
MM — are you really intending to suggest that Stan Liebowitz’s piece is racist? That’s unbelievable. You know who Stan Liebowitz is, right?
Once again, an invitation to substance devolves. Too bad. This is, like statistical group differences, an important and interesting topic. Perhaps one day we can have a civil back and forth about it.
“all the while saying that you think blacks happen to be less intelligent.”
False and absurd.
Now I’ve seen it all.
de-regulation in the name of affirmative action causes a crisis, and it gets blamed on the reagan revolution?
Oh, I forgot, this is vox nova
If the “rich” people really wanted to screw the “poor” people, they wouldn’t lend them money to begin with. Then they wouldn’t lose their shirts when those same “poor” people who shouldn’t have gotten credit in the first place default on their loans.
Even the wage slave needs a wage in order to be a useful tool…
“…de-regulation in the name of affirmative action causes a crisis…
”
I thought there was nothing left to scape-goat African Americans for, as the whole gamut I thought to be exhausted. But his takes the cake, Unscrupulous lending practicionners, with no governmental regulation, are not the culprits of the current financial calamity; No, liberal do-gooders and blacks are to blame.
How does one even respond to this stuff? Incredible.
Sbuck: no, I’ve never heard of Liebowitz. And no, I’m not calling him racist. All I will say is that this thesis not appeared in any of the columns, essays, papers I have read on the topic (many, many, many since last August especially) or in any of the talks I’ve attended (a few)– so either it’s not relevant as an explanation, or there is a massive economic and financial conspiracy to hide the true nature of this crisis.
“I thought there was nothing left to scape-goat African Americans for, as the whole gamut I thought to be exhausted. But his takes the cake,”
Wow – you didn’t stop to think that affirmative action might actually apply to people who are “disadvantaged” in any way?
Like low income:
whites?
Hispanics?
Chinese immigrants without a credit history?
eskimos?
Spanish people?
Irish people?
romanian people?
“Incredible”!