To regulate or not to regulate?
October 8, 2008 11:32 AM Subscribe
Are there any non-regulatory policies that could have prevented the economic meltdown?
When discussing current economic conditions, a statement I frequently hear from conservatives and libertarians is that the current problems are "not a failure of deregulation." I'm wondering what policies those who support continued deregulation of the financial and housing sectors believe would have prevented these problems, or will prevent recurrences.
(I'm asking this out of honest ignorance - economics has never been my strong suit, and at the moment there's a lot of blame and rhetoric flying around from all over the political spectrum, but I'm not hearing a lot of concrete policy proposals.)
When discussing current economic conditions, a statement I frequently hear from conservatives and libertarians is that the current problems are "not a failure of deregulation." I'm wondering what policies those who support continued deregulation of the financial and housing sectors believe would have prevented these problems, or will prevent recurrences.
(I'm asking this out of honest ignorance - economics has never been my strong suit, and at the moment there's a lot of blame and rhetoric flying around from all over the political spectrum, but I'm not hearing a lot of concrete policy proposals.)
Response by poster: mr_roboto: I understand that the truth of the arguments will be undecidable for many years to come. At this point, I'm interested in what policies are being proposed and discussed by those not in favor of additional regulation.
posted by murphy slaw at 11:43 AM on October 8, 2008
posted by murphy slaw at 11:43 AM on October 8, 2008
One non- (or para-) regulatory tactic that I've heard is that the interest rates were kept too low for too long.
However, to eliminate possible ideological underpinnings to the question you'd have to ask the people you hear from whether there's a such thing as bad deregulation. If they see all deregulation as good, then they're much less likely to see any of its failures.
posted by rhizome at 11:45 AM on October 8, 2008
However, to eliminate possible ideological underpinnings to the question you'd have to ask the people you hear from whether there's a such thing as bad deregulation. If they see all deregulation as good, then they're much less likely to see any of its failures.
posted by rhizome at 11:45 AM on October 8, 2008
One of the failures was that the people who were to act as gatekeepers failed to do their job, mostly due to greed/opportunism/what have you.
For instance, home appraisers happily signed off on whatever the bank wanted to see for a number rather than give an 'honest' evaluation. (Appraisers who stuck to their guns simple were not hired to do the job.)
Loan officers are tasked with ensuring that the people taking out the loan are able to pay it back. However, they had negative incentive to deny people since the origination offices could sell any loan off for a profit immediately.
Ratings agencies could have given out low ratings to CDOs et al rather than giving them AAA ratings, which threw gasoline on the fire.
The system failed itself in a big way.
posted by unixrat at 11:55 AM on October 8, 2008
For instance, home appraisers happily signed off on whatever the bank wanted to see for a number rather than give an 'honest' evaluation. (Appraisers who stuck to their guns simple were not hired to do the job.)
Loan officers are tasked with ensuring that the people taking out the loan are able to pay it back. However, they had negative incentive to deny people since the origination offices could sell any loan off for a profit immediately.
Ratings agencies could have given out low ratings to CDOs et al rather than giving them AAA ratings, which threw gasoline on the fire.
The system failed itself in a big way.
posted by unixrat at 11:55 AM on October 8, 2008
Are there any non-regulatory policies that could have prevented the economic meltdown?
"Don't loan money to people who can't afford to pay it back."
posted by Class Goat at 12:14 PM on October 8, 2008 [1 favorite]
"Don't loan money to people who can't afford to pay it back."
posted by Class Goat at 12:14 PM on October 8, 2008 [1 favorite]
Best answer: Here's a great article from the Washington Post on deregulation and the current crisis.
posted by BobbyVan at 12:18 PM on October 8, 2008
posted by BobbyVan at 12:18 PM on October 8, 2008
At this point, I'm interested in what policies are being proposed and discussed by those not in favor of additional regulation.
I have heard some opinions meeting those criteria, posted on web forums. I'm well aware that this isn't a very good source.
One view is that the problems are caused by legislation and things like Fannie Mae and Freddie Mac (both 'government sponsored enterprises') existing at all.
Another opinion is that the government bailout we have seen happen distorted the market by externalizing risk. That is, the rational action when there is a government bail-out on the cards is different to the rational action when there is no chance of a government bail-out. If we had a military-and-police-only government, companies would not have become "too big to fail" in the first place.
Another view is that the 'crisis' is being overstated by greedy bankers looking for a $700,000,000,000 payout.
I've also heard the opinion that the problem is we don't use the gold standard any more, which is an anti-regulatory opinion in the sense that it is anti-our-government-issued-currency.
That's all the things that spring to mind at the moment...
posted by Mike1024 at 12:36 PM on October 8, 2008 [1 favorite]
I have heard some opinions meeting those criteria, posted on web forums. I'm well aware that this isn't a very good source.
One view is that the problems are caused by legislation and things like Fannie Mae and Freddie Mac (both 'government sponsored enterprises') existing at all.
Another opinion is that the government bailout we have seen happen distorted the market by externalizing risk. That is, the rational action when there is a government bail-out on the cards is different to the rational action when there is no chance of a government bail-out. If we had a military-and-police-only government, companies would not have become "too big to fail" in the first place.
Another view is that the 'crisis' is being overstated by greedy bankers looking for a $700,000,000,000 payout.
I've also heard the opinion that the problem is we don't use the gold standard any more, which is an anti-regulatory opinion in the sense that it is anti-our-government-issued-currency.
That's all the things that spring to mind at the moment...
posted by Mike1024 at 12:36 PM on October 8, 2008 [1 favorite]
My view is that this is one of those cases where the landscape has changed too much to easily regulate it back into coherency. Hard to put the toothpaste back into the tube, as it were. And what follows is specifically about the housing bubble/crisis/ subprime lending, and, and, and.
I am biased in my economic point of view, and also possibly simplistic, so I won't make a terribly long point, but the beginning of this to me is when banking was deregulated to create regional and then national banks. Perhaps there were good reasons for it, but to me, it took the sense of the local and the community out of lending. Slippery slope and all that, eventually we get lenders who have no sense of what it is they are lending on, or who they are lending to. And with the credit swap instruments and other such mortgage bundling, the national lenders thought they were distributing the risk, somewhat in the way that covering every number on the roulette table will produce a win every time. (As well as substantial and mounting losses.)
But I acknowledge my bias against unfettered unregulated financial capitalism. I think that the markets on derivatives and futures are just sophisticated gambling instruments invented to siphon money out of the production/consumption cycle without providing any demonstrable added value to tangible goods.
The freewheeling market-will-always-resolve-itself has not worked in our country and that is demonstrated by Paulsen's determinations that some firms (Lehman) are not too big to fail, but others (A-I-G) are. If the market will self-regulate and self-correct then they should all be allowed to fail. But that has not been the case in our mixed-market economy certainly during my entire 55 years on this planet.
So, i am on the side of government intervention, and on the side of regulation. And I am also on the side of limiting speculation, hoarding, and against the introduction of complex financial instruments that are seemingly designed solely to enrich the coffers of those who are the ones who design the instruments and not add demonstrable value to goods, products, or services.
I know just enough about the "dismal science" of economics to agree that Adam-Smithian invisible hand markets could work. but too many people forget that Smith considered The Theory of Moral Sentiments to be his important work and a necessary component to the economic theories of The Wealth of Nations. But while I agree with the bottom line intentions of Moral Sentiments, it relies on a paternalistic system of capitalists to function as plutocracy.
If I were cynical enough to believe that the officials of our government were the primary beneficiaries of the money siphoned out of the American economy, then I would say we are in a kleptocracy. But I know that can't be right because in 2006, the Bush Administration enunciated a policy specifically to internationalize an effort to resist kleptocracies.
I'm also not starry-eyed enough to believe that altruistic communism can work.
But I feel we have to put an end to the lie of the Reagan Revolution that the free markets are their own best regulation. Whether demonstrated by our financial apparatuses or the totalitarian capitalism of China (the melamine, lead in toys, name your problem here), it is clear that the best system has the common good of all at its center.
Is regulation necessary? I guess I would paraphrase Madison: If men were angels, no regulation would be necessary.
posted by beelzbubba at 12:39 PM on October 8, 2008
I am biased in my economic point of view, and also possibly simplistic, so I won't make a terribly long point, but the beginning of this to me is when banking was deregulated to create regional and then national banks. Perhaps there were good reasons for it, but to me, it took the sense of the local and the community out of lending. Slippery slope and all that, eventually we get lenders who have no sense of what it is they are lending on, or who they are lending to. And with the credit swap instruments and other such mortgage bundling, the national lenders thought they were distributing the risk, somewhat in the way that covering every number on the roulette table will produce a win every time. (As well as substantial and mounting losses.)
But I acknowledge my bias against unfettered unregulated financial capitalism. I think that the markets on derivatives and futures are just sophisticated gambling instruments invented to siphon money out of the production/consumption cycle without providing any demonstrable added value to tangible goods.
The freewheeling market-will-always-resolve-itself has not worked in our country and that is demonstrated by Paulsen's determinations that some firms (Lehman) are not too big to fail, but others (A-I-G) are. If the market will self-regulate and self-correct then they should all be allowed to fail. But that has not been the case in our mixed-market economy certainly during my entire 55 years on this planet.
So, i am on the side of government intervention, and on the side of regulation. And I am also on the side of limiting speculation, hoarding, and against the introduction of complex financial instruments that are seemingly designed solely to enrich the coffers of those who are the ones who design the instruments and not add demonstrable value to goods, products, or services.
I know just enough about the "dismal science" of economics to agree that Adam-Smithian invisible hand markets could work. but too many people forget that Smith considered The Theory of Moral Sentiments to be his important work and a necessary component to the economic theories of The Wealth of Nations. But while I agree with the bottom line intentions of Moral Sentiments, it relies on a paternalistic system of capitalists to function as plutocracy.
If I were cynical enough to believe that the officials of our government were the primary beneficiaries of the money siphoned out of the American economy, then I would say we are in a kleptocracy. But I know that can't be right because in 2006, the Bush Administration enunciated a policy specifically to internationalize an effort to resist kleptocracies.
I'm also not starry-eyed enough to believe that altruistic communism can work.
But I feel we have to put an end to the lie of the Reagan Revolution that the free markets are their own best regulation. Whether demonstrated by our financial apparatuses or the totalitarian capitalism of China (the melamine, lead in toys, name your problem here), it is clear that the best system has the common good of all at its center.
Is regulation necessary? I guess I would paraphrase Madison: If men were angels, no regulation would be necessary.
posted by beelzbubba at 12:39 PM on October 8, 2008
a statement I frequently hear from conservatives and libertarians is that the current problems are "not a failure of deregulation." I'm wondering what policies those who support continued deregulation of the financial and housing sectors believe would have prevented these problems, or will prevent recurrences
I'm actually in favor of stronger financial regulations and oversight, but this is how I would argue it from the devil's advocate position:
The crisis was not caused by a failure to regulate, but a failure by all parties involved to realize that the system they created was based on faulty assumptions. In an area like insider trading, regulation makes sense because without it people would unfairly exploit the system for personal gain. In this case, though, if it was obvious that the actions leading up to the crisis would cause so much damage to everyone involved, the parties themselves would have prevented it.
Regulations would only have worked if the government had recognized that system was in danger and needed to be protected. Based on the initial failure of Congress to pass a rescue bill and the shock from the subsequent stock market crash, it's clear that many members of the government still don't understand how the system works, and tend to let political concerns override their judgment on economic issues. The people who are best prepared and motivated to prevent economic disasters are the major participants of the economy themselves, but unfortunately in this case even the most prepared didn't see this coming in time to stop it.
To make an analogy, the 9/11 attacks were not primarily a failure of airport security. Regulations have increased since then, but it's arguable whether all of the time and money spent on them is worth it, because now that everyone is aware of the danger, an identical attack would most likely be unsuccessful even without any increased security. Instead, the government would need to predict what future attacks might be, and regulate security to protect against those, which is much more challenging.
posted by burnmp3s at 12:43 PM on October 8, 2008
I'm actually in favor of stronger financial regulations and oversight, but this is how I would argue it from the devil's advocate position:
The crisis was not caused by a failure to regulate, but a failure by all parties involved to realize that the system they created was based on faulty assumptions. In an area like insider trading, regulation makes sense because without it people would unfairly exploit the system for personal gain. In this case, though, if it was obvious that the actions leading up to the crisis would cause so much damage to everyone involved, the parties themselves would have prevented it.
Regulations would only have worked if the government had recognized that system was in danger and needed to be protected. Based on the initial failure of Congress to pass a rescue bill and the shock from the subsequent stock market crash, it's clear that many members of the government still don't understand how the system works, and tend to let political concerns override their judgment on economic issues. The people who are best prepared and motivated to prevent economic disasters are the major participants of the economy themselves, but unfortunately in this case even the most prepared didn't see this coming in time to stop it.
To make an analogy, the 9/11 attacks were not primarily a failure of airport security. Regulations have increased since then, but it's arguable whether all of the time and money spent on them is worth it, because now that everyone is aware of the danger, an identical attack would most likely be unsuccessful even without any increased security. Instead, the government would need to predict what future attacks might be, and regulate security to protect against those, which is much more challenging.
posted by burnmp3s at 12:43 PM on October 8, 2008
Best answer: As kind of a broad way of thinking about this, when governments use "policy" to influence the operation of the market, there's two types of tools they can use: regulation and litigation.
That is, if the government passes a law saying "you're not allowed to do X," they can either regulate before anyone gets a chance to break the law--make ALL companies file certain forms and undergo certain audits to make sure they are complying with the law, even when there is no evidence of wrongdoing--or they can litigate after-the-fact, and take companies or officers of the corporation to court only after they have broken the law. Litigation can either have civil penalties (companies have to pay fines or damages for breaking the law) or criminal penalties (officers of the company go to jail for breaking the law).
Some conservatives obviously believe that LAWS themselves are a problem, so deregulation means "let's have fewer laws that limit what companies can do." Most progressives/liberals believe this is the standard conservative "deregulation" position, but I think it's an overly simplistic take on what most (economic) conservatives believe. I think it's just as likely that when someone says deregulation is fundamentally a good thing and not the problem that caused this mess, they're not arguing that making laws about what companies can and cannot do is faulty, just that the use of regulation rather than litigation to enforce those laws is wrong-headed. People who hold this view see it as a productivity drag or barrier to entry to force all companies to comply with the burdens of regulation, rather than just focusing on policing companies that you believe are breaking the law. Innocent until proven guilty, in a way.
I imagine someone who thinks that "deregulation wasn't the problem" would tell you that the companies who created this mess did so by breaking the law (e.g., mortgage brokers engaging in fraud or deception), and so it wasn't deregulation that is the problem, it's that the government didn't go hard enough after people breaking the law, and so creating more regulation isn't the answer.
Personally, I don't particularly agree with this logic--the business practices that moved this from "lots of people defaulting on mortgages" (potentially a result of illegal practices or fraud) to "OMG the entire system is melting" were largely legal things for companies to do, that they did stupidly because no regulators were keeping an eye on them closely enough to sound the alarm bells and create new laws that would address the new brand of stupidity they were engaging in. So I'm not sure how you can get from "no regulation" to sensible laws when conditions on the ground change, because without regulation the government doesn't know what's going on. To me, that's the main flaw with the "litigate, don't regulate" philosophy of enforcing laws.
posted by iminurmefi at 12:53 PM on October 8, 2008
That is, if the government passes a law saying "you're not allowed to do X," they can either regulate before anyone gets a chance to break the law--make ALL companies file certain forms and undergo certain audits to make sure they are complying with the law, even when there is no evidence of wrongdoing--or they can litigate after-the-fact, and take companies or officers of the corporation to court only after they have broken the law. Litigation can either have civil penalties (companies have to pay fines or damages for breaking the law) or criminal penalties (officers of the company go to jail for breaking the law).
Some conservatives obviously believe that LAWS themselves are a problem, so deregulation means "let's have fewer laws that limit what companies can do." Most progressives/liberals believe this is the standard conservative "deregulation" position, but I think it's an overly simplistic take on what most (economic) conservatives believe. I think it's just as likely that when someone says deregulation is fundamentally a good thing and not the problem that caused this mess, they're not arguing that making laws about what companies can and cannot do is faulty, just that the use of regulation rather than litigation to enforce those laws is wrong-headed. People who hold this view see it as a productivity drag or barrier to entry to force all companies to comply with the burdens of regulation, rather than just focusing on policing companies that you believe are breaking the law. Innocent until proven guilty, in a way.
I imagine someone who thinks that "deregulation wasn't the problem" would tell you that the companies who created this mess did so by breaking the law (e.g., mortgage brokers engaging in fraud or deception), and so it wasn't deregulation that is the problem, it's that the government didn't go hard enough after people breaking the law, and so creating more regulation isn't the answer.
Personally, I don't particularly agree with this logic--the business practices that moved this from "lots of people defaulting on mortgages" (potentially a result of illegal practices or fraud) to "OMG the entire system is melting" were largely legal things for companies to do, that they did stupidly because no regulators were keeping an eye on them closely enough to sound the alarm bells and create new laws that would address the new brand of stupidity they were engaging in. So I'm not sure how you can get from "no regulation" to sensible laws when conditions on the ground change, because without regulation the government doesn't know what's going on. To me, that's the main flaw with the "litigate, don't regulate" philosophy of enforcing laws.
posted by iminurmefi at 12:53 PM on October 8, 2008
Nobody's yet mentioned The Fed. Some economists blame its monetary policies for the housing bubble.
The whole arm's length mechanism of having the Federal Reserve set interest rates and manage the money supply is a way of avoiding regulation. In theory a truly free market would have no central bank at all. But in practice almost every country has one. In almost every case they're large enough to be able to influence the market with the smallest of policy changes, such as raising or lowering the interbank lending rate a fraction of a point.
Mind you, I'm not saying it's all due to monetary policy. I am saying that monetary policy is one of those "non-regulatory policies" that you're asking about, and it was not inconsequential to the current crisis.
posted by dhartung at 1:26 PM on October 8, 2008
The whole arm's length mechanism of having the Federal Reserve set interest rates and manage the money supply is a way of avoiding regulation. In theory a truly free market would have no central bank at all. But in practice almost every country has one. In almost every case they're large enough to be able to influence the market with the smallest of policy changes, such as raising or lowering the interbank lending rate a fraction of a point.
Mind you, I'm not saying it's all due to monetary policy. I am saying that monetary policy is one of those "non-regulatory policies" that you're asking about, and it was not inconsequential to the current crisis.
posted by dhartung at 1:26 PM on October 8, 2008
The problem with the monetary policy view is that monetary policy is a form of regulation; suggesting that operating under a different set of rules (gold standard, silver standard, whatever) for money supply is suggesting a different regulatory regime. If anything, fiat currency is deregulated currency.
posted by rodgerd at 1:33 PM on October 8, 2008
posted by rodgerd at 1:33 PM on October 8, 2008
Best answer: I suspect the "it's not de-regulation's fault" rants are true, mostly. The deregulation that did occur probably didn't hurt anything. But the failure was in not recognizing that the derivitives marketplace had changed and literally innovated past the regulations. What failed was that there were no regulations at all, ever, in that arena. Not that anyone took them away.
The deregulation that occurred was to allow different types of banks combine operations and/or enter the other types of banks marketspace. This would tend to increase competition and make things better, not worse.
Also, while I think the Fed's low interest rate monetary policy did have a hand in this, I also don't think one can blame them too much. At some point, the Fed has to act on the information they have at hand, and I don't think they could have forseen what was to happen.
posted by gjc at 4:50 PM on October 8, 2008
The deregulation that occurred was to allow different types of banks combine operations and/or enter the other types of banks marketspace. This would tend to increase competition and make things better, not worse.
Also, while I think the Fed's low interest rate monetary policy did have a hand in this, I also don't think one can blame them too much. At some point, the Fed has to act on the information they have at hand, and I don't think they could have forseen what was to happen.
posted by gjc at 4:50 PM on October 8, 2008
This thread is closed to new comments.
posted by mr_roboto at 11:39 AM on October 8, 2008