Crisis calls for the right regulation
When regulation goes bust, it's easy to blame the whole system and say all regulation needs tweaking. Commentator Will Wilkinson says it's not about a need for more or less regulation, but for the right regulation.
Commentator Will Wilkinson (The Cato Institute)
More on Commentaries, America's Financial Crisis
TEXT OF COMMENTARY
Renita Jablonski: Hey, there is a lot of finger pointing going on these days about the causes of the financial crisis. Commentator Will Wilkinson weighs in with his thoughts.
Will Wilkinson: Is our current financial crisis the product of too little government regulation, or too much?
Advanced financial markets don't exist in a vacuum. They operate in a framework of law that defines ownership and sets acceptable terms of exchange. Some of these markets are entirely creatures of government.
The market in treasury securities, for example, is key to Washington's ability to control the money supply. And the market in mortgage-backed securities -- ground zero of the crisis -- began in earnest when the government under Lyndon Johnson started pooling home loans into securities and selling them off to investors.
We all know the current mess was triggered by a speculative bubble in home prices. And the origins of the bubble are familiar: easy money, meaty tax deductions for homeowners, and relaxed lending standards.
But let's not forget the market for mortgage-backed securities. It took the highly risky form it did because the government created entities like Fannie Mae and Freddie Mac and gave them certain regulatory advantages. Government policy created market incentives that helped lead us toward disaster.
One lesson of the crisis is that ours is hardly a "free" market system. The American economy is a byzantine amalgam of market and state institutions enmeshed in a thicket of regulation. When part of it goes bust, it's too easy to pin the whole blame on market failure. A market is only as stable as the regulations that define it.
We don't need more regulation or less. We need better regulation. But who will give it to us? Technocrats, like Ben Bernanke and Henry Paulson? Congress? Our fearless lawmakers on Capitol Hill did very little to alter Paulson's initial two and a half-page plan -- other than to add 450 pages of pork.
The real question now is not whether we need more regulation or less. It's whether our political process can deliver the right regulation. I'm not getting my hopes up.
Jablonski: Will Wilkinson is a research fellow at the Cato Institute.
Comments
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From Ventura, CA, 02/09/2009
Nick, You only need to consult Christopher Cox's (the SEC Chair) testimony regarding the Madoff scandal and, of course, the Long Term Capital debacle to see the disastrous effects of 1) the lack of enforcement by a completely Republican and "conservative" administration and 2) what results from inadequate regulation of new vehicles. Even if specific regulations weren't removed, Cox's remarks are a confession of lack of enforcement. This is precisely why Spitzer and Cuomo were able to make names for themselves by using New York state law to accomplish what Federal law could not. I'm not familiar enough with the Congressional record to cite specific laws, but, of course, Cato "scholars" like Wilkinson never do, either. One thing is certain. The absence of regulation--in the form of nonexistent laws or nonexistent regulation--is what Cato has always pushed for, and we see its disastrous results clearly. I trust you can cite which regulations did and did not change? I hope you will enlighten me and the readers of this page. I trust you can similarly enlighten us as to why the highway/markets comparison is wrong?
From Atlanta, GA, 10/09/2008
Payam - Prove it.
Please cite which regulations were done away with and illustrate how leaving them in place would have prevented this crisis.
As a bonus, if there are regulations that were removed by congress, please go back to congressional record, use their testimony, and tell us all why the regulations were done away with.
And we don't need any more comparisons between highways and markets - It was as interesting as it was incorrect.
Please, just the facts.
From Ventura, CA, 10/08/2008
Dearest Marketplace,
Today's piece by Wilkinson was perhaps his most absurd to date. Let's use the German Autobahn to illustrate the point.
The Autobahn was built by the German government for speed. On many stretches, speed limits do not exist. In anticipation of the tragedy that can result when unlimited speed is subjected to human folly, the German government heavily regulates drivers, cars and streets: drivers are trained rigorously, cars are required to be well maintained, and the Autobahn's surface is always kept flat. Consequently, when crashes (frequently, fatal ones) occur, the government is NOT to blame. The drivers are.
Fannie Mae and Freddie Mac were similar government creations. They sped up financial transactions by enabling the encapsulation of mortgages in securities. This system was regulated for a very long time, and it was exceptionally successful when it was regulated. Then, people like Mr. Wilkinson of the Cato Institute insisted that regulations is bad. When they got their way, the whole system crashed because, by analogy, we had poorly trained drivers driving jalopies at high speeds on the Autobahn. And now, Wilkinson is lamenting the fact that the government did not have the wisdom to regulate.
Given the Cato Institute's long history of categorical insistence on NO regulation--NOT EVEN EFFECTIVE REGULATION--Wilkinson's comments constitute remarkable hypocrisy. In as much, the Cato Institute is the ultimate think tank. Nobody there bothers to awaken from his or her stupor long enough to become aware of reality and history. So, let me refresh their memories:
Fannie Mae and Freddie Mac worked perfectly fine while they were regulated. It was when deregulation injected fraud and lack of accountability into mortgage backed securities that the whole system failed. Nobody can be blamed for that except the individuals who demanded deregulation (like Wilkinson) and those who abused it. If we do not blame the German government for building the Autobahn, then we cannot blame the government for creating the FMs!!!!
If you're going to broadcast Wilkinson's hot air, then surely you ought to give equal time to reality and history.
If not, take Cato "scholars" off the air!
Sincerely,
Payam Minoofar, Ph.D.
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