Sunday, March 29, 2009

Arnold Kling Letter In The Washington Post

Arnold Kling's letter to the editor:

The March 26 front-page story "Geithner to Propose Vast Expansion of U.S. Oversight of Financial System" said that Treasury Secretary Timothy F. Geithner's proposal would mean "breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit."

In fact, banks have been subject to strict, risk-based capital requirements. It was these very capital requirements, which favored triple-A-rated securities, that produced the boom in the creation of structured products backed by subprime mortgages.

Risk-based capital requirements were a response to the savings and loan crisis of the 1980s, and regulators were confident that with those requirements in place, we would not see a repeat. As we watch Mr. Geithner's plan make its way through Congress, we should be wary that it, too, will seem like the correct response to the present crisis while laying the basis for the next one.


Those who do not know history...

And speaking of regulation, I wanted to note this Powerline post from a ways back:

Drama on the Hill

"In fact, the industries involved are heavily regulated, and I'm not aware of any instances where a lack of regulation, as opposed to a failure of regulation, is to blame for a significant aspect of the crisis. In general, what happened was that regulators and businessmen made the same mistake: they failed to foresee the decline in real estate values and, perhaps more important, failed to understand fully the consequences that would flow from such a decline. That is the context in which Polakoff's testimony was revealing:

HENSARLING: I believe I heard in an earlier answer to one of the questions, I believe I heard you say that OTS in 2004 should have stopped the book of business that I think you were alluding to to CDS and the AIG securities lending commitments. Did I understand you correctly?

POLAKOFF: Yes, sir.

HENSARLING: So if you said you should have stopped it in 2004, that implies you could have stopped it in 2004. Is that correct?

POLAKOFF: Yes, sir.

HENSARLING: So there were not limits on your power. Perhaps, there were limits on your knowledge or insight, but there was not limits on your power to stop what you cite, as I believe AIG's liquidity -- I'm reading from your testimony -- was the result of AIG's business lines. So you did have the power to stop those business lines. Is that correct?

POLAKOFF: Yes, sir. ***

HENSARLING: Again, it appears, if this is correct, it was not a lack of supervisory authority that caused you not to take action with respect to these two lines. Is that correct?

POLAKOFF: Yes, sir.

HENSARLING: And I think I also heard you say in your testimony that you did not have [in]sufficient manpower and expertise. Is that correct?

POLAKOFF: Yes, sir.

HENSARLING: So, again, in retrospect, it wasn't the lack of authority. It wasn't the lack of resources. It wasn't the lack of expertise. You just flat made a mistake. Is that a correct assessment?

POLAKOFF: In 2004, we failed to assess how bad the mortgage economy, the real estate economy would become in 2008. Yes, sir.

It's never been clear why liberals have so much faith that regulators are smarter or better able to foresee the future than businessmen.

That last statement mirrors my own feelings. I have no idea why we would trust government bureaucrats instead of bueinessmen. Should we trust Barney Frank or Chris Dodd? What about Greenspan, he didn't see it coming? Why would a government pencil pusher have seen the big picture? What logic stands behind that faith?

Hundreds of government regulators worked on-site at AIG everyday well before the walls came crashing down. Why didn't they see it coming? Sphere: Related Content

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