The spectulative frenzy in regulation

Free framing/messaging advice for Republicans: don't let Democrats get away with turning this into conventional wisdom...

[I]t is certainly not too soon to look beyond the current crisis to the flaws and fallacies of the anti-regulatory ideology that has held Washington in its grip since the Reagan years and allowed the financial excesses that are now stressing the system to the breaking point.

Every time somebody cries "if only we had regulated!", they need to be asked two questions...

  1. What regulation would have prevented this economic problem without creating even greater problems?
  2. When, prior to this crisis, did you propose it?

I told you so isn't a very valuable contribution if you did not, in fact, tell us so.

It is particularly dumb to reflexively blame this problem on Republicans, as Nancy Pelos did, or to reflexively assume Democrats must be better, as Paul Krugman does.  Especially when facts like this, from 2003, are readily available...

  • "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."
  • "The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken."
  • "[Representative ] Oxley [and] [Senator] Shelby ... announced their intention to draft legislation... [...] ''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing."  [NOTE: Oxley and Shelby are Republicans]
  • "Among the groups denouncing the proposal today were the ... Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing."
  • ''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''"
  • "[Representative Melvin L. Watt, Democrat] 'I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.""

Republicans advocated reform, Democrats blocked it.   Then there's this, from 2006.

  • "[Fannie Mae and Freddie Mac] are entities that have demonstrated over and over again that they are deeply in need of reform.
  • "[T]he report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
  • "I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.  I urge my colleagues to support swift action on this GSE reform legislation."

That quote comes from....John McCain.  Barack Obama did not sign onto the legislation.

 

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You are right

And it doesnt help when Carly Fiorina falls into this trap of describing USA circa 2004-2008 as wild west etc. excuse me?!? SEC, CTFC, Fed, Congress, bailouts, Fannie mae (a creature of govt) ... this aint Laissez faire! Moreover, the issue is NOT 'deregulation'. The socialist mentality that govt can eliminate risk is flawed, and that somehow there is an ON and OFF switch called 'regulation'. Things on wall st are more complex than that.

What was the problem and how could it be avoided? There were specific instruments of credit , called credit swap derivatives and CMOs (collateralized Mortage Obligations) that were used to financial package mortage obligations. When the combination of sub-prime mortgages going sour and a housing bubble partly incited by the easy money hit a bubble top and burst in 2007 ... then the credit cycle tightened, and the financial institutions realized that they had hidden 'toxic assets' and leveraged risks that were not properly accounted for. There are regs up the wazoo but market players did things that they shouldnt have anyway and ended up in a hole.

The regs that would have stopped this? Tighter credit, less govt incentives for subprime mortgages (except govt kept encouraging this practice via CRA rules!); but the govt including the Fed were the last people to want to take the punch bowl away; a better understanding of CMO and credit swap obligations on balance sheets (this will require unifiying the financial oversight of the financial industry). Some have suggested an RTC like entity to buy up the toxic stuff at a steep discount and clean up the books.

But that's 20/20 hindsight. Govt keeps making regs after the fact. the main point before the fact of the next cycle is this: Credit cycles happen, markets get out of whack and to stop that is to stop the dynamic economy. What is needed is no more and no less than effective and real oversight of financial institutions so that they dont engage in excessive risk and that their risks and balance sheets are out in the open so market players and credit agencies can effectively judge them. Good financial regulation is regulation that simply ensures good information flow and ensures trust in what the players report so the market can more rationally decide and adjust.

There is one reason why we can be confident McCain will be better on this than Obama - he actually tried to stop it BEFORE it happened:

  • "I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.  I urge my colleagues to support swift action on this GSE reform legislation."

 

At the same time

 I think that it is fair to notice that the regulatory apparatus is broken. Our regulatory structures simply don't know how to handle the current financial system. There is more risk. It is more complicated. It is more hedged. It is more global.

If "more regulation" includes blowing up old structures and replacing them. Or just creating new ones that supersede the old ones, that is good.

I don't think that we should let ideology get in the way of the fact that people were calling this years out and no one cared. The regulators do have an appropriate responsibility here.

Regulation

I don't necessarily disagree.  There is a place for regulation, and it's very possible that we need some regulatory reform.   However, vague demands for "more regulation" are worrisome, as (a) they tend to be a trojan horse for other agendas, (b) they sometimes merely shift the costs to other, less visible, places, and (c) they may be duplicative of problems the market is already fixing.  And, of course, a non-trivial degree of the current problem is of the government's own doing in the first place.  Putting band-aids on band-aids is unproductive. 

I'd be more interested in some sort of coherent, limited regulatory reform than in the vague "more regulation" that is being called for.   I'd be most interested in regulatory reforms that bind the government, as well, and prevent it from creating the policy framework that creates these problems.

Comments Made for TV ad

I surely hope that the McCain campaign is going to whip up an add featuring not only quotes about McCains efforts, but quotes of who opposed it, and who was silent.

Absolutely!...

...and the battle cry  from the Repub's should be "what good are new regulations going to do if those in congress are not going to enforce them?" 

Both McCain and President Bush tried to warn Congress. 

My frustration? Why is Pres. Bush so darned silent on this issue?  He could help the GOP cause by speaking out.  A bit of "I told you so..."  would do nicely right about now.  DD

Wow, Democrats are still playing their old games

This is like the 1932 campaign when FDR blamed the Depression on the supposedly "laissez-faire" polices of the Republicans in the 1920s.   During that time the GOP with the support of Democrats engaged in protective tariffs at a time when the US economy was becoming more dependent on foreign trade (this had become a reality in the post WWI aftermath).  Hoover himself had proposed programs similar to some of FDR's later New Deal proposals to help amelorate some of the economic hardship on many groups of  Americans at the time.  FDR and many leading Dems attacked these programs as a violation of state's rights and even called them sops to the rich.

Its clear to me that since that time when the economy goes bad the DEMS reflexively blame the GOP and big business even when the fault lies squarely with bad government policies.  They eeven have the audacity to suggest it was because of too much "laissez-faire"  when clearly that is not even the case.