September 16, 2008
Greed and Gravity
ThreeSources friend the Everyday Economist links to a superb blog post by Lawrence H. White (EE calls him "Larry" but I don't know him well enough for such liberties).
On campus this afternoon I overheard the following remark by a non-economist, trying to explain to another non-economist the Lehman failure and today's stock market decline: “It’s a combination of deregulation and greed. Boy, if you deregulate enough, the greed will follow.”
If I had butted in, I would have made two points. (1) If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. (2) What deregulation have we had in the last decade? Please tell me. On the contrary, we’ve had a strengthening of the Community Reinvestment Act, which has encouraged banks to make mortgage loans to borrowers who previously would have been rejected as non-creditworthy. And we’ve had the imposition of Basel II capital requirements, which have encouraged banks to game the accounting system through quasi-off-balance-sheet vehicles, unhelpfully reducing balance sheet transparency.
When I saw the excerpt, I was afraid that the author was whacking Senator John McCain. Sadly, Senator Mac has internalized TR too much, He reflexively blamed yesterday's meltdown on greed (gravity). Of course, Senator Obama blamed it on President Bush, so I am not really declaring a winner here.
But I expect a little more from Republicans, naive waif that I am.
Economics and Markets
Posted by jk at September 16, 2008 10:54 AM
Chuck "The Schmuck" Schumer was on "Hardball" last night, spewing the same "greed" and "deregulation" nonsense. And Chris Matthews looked like he was eagerly hanging on every word that idiot said, at one point grasping his pen with both hands and leaning forward slightly.
"Deregulation," what nonsense. Repealing the Glass-Steagall Act is often blamed for the subprime mess but actually did NOTHING beyond what was already there. Allowing commercial and investment banks to merge, and the ability to collateralize mortgages into securities, wouldn't have done anything without the very fact that people were buying homes they couldn't afford, and that mortgage lenders were being given carrots and sticks to give out subprime loans. In fact, collateralization of anything, not just debt obligations, doesn't make it possible to sell that underlying something. It only makes it *easier* to buy it in a bundle and at the amount you want. Investors, through whichever broker they use, could still buy a bunch of securities from a bank, but the popularity of CDOs made it much easier. There's nothing inherently wrong with that, either: as an investor, your punishment for a bad investment is built in.
Meanwhile, you can't tell me (some of you may recall I work in compliance) that the SEC and other government entities aren't regulating things. There is immense regulation everywhere you turn. The problem is that the regulation breeds moral hazard: investors think that if something is regulated (let alone it'll be backed by the government), it must be safer. Do we really think that Lehman would have lasted so long if investors didn't have the comfort of knowing it was buying "regulated" CDOs? Hell no: investors would have run for the hills once Lehman "announced intentions" to buy "these ultra-risky mortgage-backed securities that could lose all value at any time."
On the subject of Fannie and Freddie, it is FACT that they are responsible for the majority of the problems. Lenders made bad loans, which were collateralized, and Fannie and Freddie were all too eager to buy them. It is also fact that they were able to do so courtesy of their charters that gave them explicit backing by the federal government. THEY are the companies who grew too big, because government birthed, bred and fed them. I'm hardly the only one who warned that people are fooling themselves if they thought the federal government wouldn't step in to "save" them.
Chuck "The Schmuck" Schumer was on "Hardball" last night, spewing the same "greed" and "deregulation" nonsense. And Chris Matthews looked like he was eagerly hanging on every word that idiot said, at one point grasping his pen with both hands and leaning forward slightly.
"Deregulation," what nonsense. Repealing the Glass-Steagall Act is often blamed for the subprime mess but actually did NOTHING beyond what was already there. Allowing commercial and investment banks to merge, and the ability to collateralize mortgages into securities, wouldn't have done anything without the very fact that people were buying homes they couldn't afford, and that mortgage lenders were being given carrots and sticks to give out subprime loans. In fact, collateralization of anything, not just debt obligations, doesn't make it possible to sell that underlying something. It only makes it *easier* to buy it in a bundle and at the amount you want. Investors, through whichever broker they use, could still buy a bunch of securities from a bank, but the popularity of CDOs made it much easier. There's nothing inherently wrong with that, either: as an investor, your punishment for a bad investment is built in.
Meanwhile, you can't tell me (some of you may recall I work in compliance) that the SEC and other government entities aren't regulating things. There is immense regulation everywhere you turn. The problem is that the regulation breeds moral hazard: investors think that if something is regulated (let alone it'll be backed by the government), it must be safer. Do we really think that Lehman would have lasted so long if investors didn't have the comfort of knowing it was buying "regulated" CDOs? Hell no: investors would have run for the hills once Lehman "announced intentions" to buy "these ultra-risky mortgage-backed securities that could lose all value at any time."
On the subject of Fannie and Freddie, it is FACT that they are responsible for the majority of the problems. Lenders made bad loans, which were collateralized, and Fannie and Freddie were all too eager to buy them. It is also fact that they were able to do so courtesy of their charters that gave them explicit backing by the federal government. THEY are the companies who grew too big, because government birthed, bred and fed them. I'm hardly the only one who warned that people are fooling themselves if they thought the federal government wouldn't step in to "save" them.
Posted by: Perry Eidelbus at September 16, 2008 12:15 PMAmen, brother.
The IBD has a nice editorial detailing the extent to which regulation caused it.
Posted by: jk at September 16, 2008 12:28 PM
The financial market is probably second only to pharmaceuticals in terms of regulation.
Actually, the solution is quite simple. Let's pass a law that prohibits stock and home values from ever declining. That'll solve it.
Posted by: Boulder Refugee at September 16, 2008 12:58 PM | What do you think? [3]