THE PLANK MARCH 10, 2009
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I just got back from a talk by Ben Bernanke at the Council on Foreign Relations. The Fed chair laid out a rather compelling vision for stabilizing the financial markets, including the obvious (but still refreshing to hear) principle that the more systemically important the institution, the greater the need for government oversight. This should go without saying, and yet clearly the last generation of public regulations have tilted in the opposite direction. He also called for a new systemic risk authority, in the form of either greater powers at the Fed or a new independent regulatory body (left unanswered was how this would jibe with larger moves to restructure the federal and state regulatory system). If we tackle the problem successfully and soon, Bernanke said, there was good reason to expect the recession to end this year and for 2010 to be a growth year.
This is all well and good and optimistic, in the measured way our Fed chairman needs to be right now. Still, one thing bothered me. At the outset, Bernanke made clear that he was only going to talk about the U.S. economy; "I will," he said, "take as self-evident that, in light of the global nature of financial institutions and markets, the reform of financial regulation and supervision should be coordinated internationally to the greatest extent possible." Fair enough, but in predicting growth next year, he was not only recommending but assuming that the world would pursue equally vigorous and coordinated stabilizing actions. Is that at all likely--especially when the Fed chair decides not even to address it? And, absent international action, will any of his recommendations this morning make a sufficient difference?
In other words, Bernanke's speech encapsulated all that is wrong with Washington's current approach. They talk a great game about working with other countries and coordinating policy, but when it comes to proposing and implementing concrete steps--say, a global financial regulator--they are speechless. As for why, I'm not sure which option is worse: Either they don't take the inextricably global nature of the crisis sufficiently seriously, or they do, but have no idea how to address it.
--Clay Risen
3 comments
Nothing really wrong with this, but I find the talk about the need for "systemic regulation" rather funny. These guys, all of whose highest priority is avoiding be held responsible for anything, would like us all to believe that the disaster happened because, in the modern world, there are systemic effects that no one could have understood. That is complete nonsense. When margin regulations were introduced after the crash of '29, it was perfectly well understood that the purpose was not only to protect individual institutions, but to limit the leverage in the system as a whole. Since the Reaganite, Friedmanite flat-earth wingnuts took control of the system, they have been hell bent on getting rid of all forms of regulation. They learned nothing and they know nothing other than their weird economic religion of unfettered free markets.
In many cases, it would not have been politically possible to do away with the regulatory agency involved, so they just hollowed it out or allowed market actors to sidestep the regulation. In allowing securitized lending free of capital constraints, our government was permittimng just the sort of leverage that banking and securities regulation was intended to prevent. Literally, it was outside of the banking system (although the transaction inventories alone turned out to be enough to sink the system even with most of the toxic crap sold to third parties. But the market effects of the leverage were were no different than if the banks had been putting all the same stuff right on their books. Indeed, the securitized loan pools are essentially one-off banks, free of banking regulation. Worse, in legalizing what was nothing more than accounting fraud, permitting market actors to keep derivatives off their balance sheets, they even removed the discipline of market oversight.
Did we need fancy, 21st century "systemic" regulation to prevent this crisis? No, we did not. All we needed was systematic regulation of financial firms and instruments along the lines clearly laid out in the 1930s. Did the market in the interim invent new forms that needed to be brought within the established regulatory regime? Of course it did. But we didn't need to know anything more than was understood about leverage and disclosure in 1933 to do the right thing, the necessary thing. We just had to be willing to do it.
As for collective action with other countries, while essential, it is very hard to achieve under current circumstances. First, I think, the US is going to have to re-establish its credibility as the leader of the world economic system by decisively getting its own house in order. Then we will have the leverage to cajole and to some extent force other countries to do their necessary share. All the more reason to stop the dithering.
- roidubouloi
March 10, 2009 at 1:04pm
We don't need a global financial regulator in the first instance. Unwieldy and probably unworkable. We need a Uniform Commercial Code of financial regulation. Basel ain't it.
- roidubouloi
March 10, 2009 at 1:07pm
When it comes to why there is no global coordination, I would guess that it is the latter of the two options.
2 more things: Will someone please get roidubouli a blog already! His insights have been measured, well written, and incredibly insightful.
Secondly, this should be cross-posted at The Stash.
- jyunis
March 10, 2009 at 9:45pm