In my Monday column for the FT I take issue with the view that what went wrong in financial markets had nothing to do with regulatory failure, and make the case for tightening some rules, and creating some new ones.
When the crisis in US and global financial markets started to unfold, so began the incantation of two default opinions. One: regulation is the answer and we must have more. Two: regulation is the problem and more would be worse. With all that chanting to be getting on with, neither choir has time to look at what has happened. Which is as well: the details might call for some thought.
I am a pro-market type, whose stock-in-trade is to warn of the unintended consequences of hasty or excessive regulation. In the present case, however, we are badly served by our usual catechism. This time, elements of large-scale regulatory failure are indisputably at the centre of what has happened. If, for the sake of leaving our prejudices in peace, we deny the obvious, we bring our regard for markets into disrepute and have nothing to offer by way of an intelligent policy response.Financial crises rarely have a single cause and the current one is no exception. But with all due respect for the complexity of the matter, can anybody deny that the US market for subprime mortgages was a critical component? And can anybody apart from Alan Greenspan, former chairman of the Federal Reserve, look at the way this business was conducted and argue that it was adequately regulated? At the origination level, fraud was a factor, to be sure – and fraud is illegal, with or without new rules. But indefensibly bad practice was widespread, too, by originators that were lightly regulated or completely unregulated. Much of this bad lending was preventable by ordinary standards of prudence – and to say so is not the wisdom of hindsight. The late Edward Gramlich, a former Fed governor, gave ample warning of this regulatory lacuna.
He was right and Mr Greenspan was wrong. The subprime mortgage business needs more regulation. There, was that so hard?
You can read the rest of it here.
A Constitutional Framework, Not More Legal Verbiage and Sham
The problem of enforcing law and regulation on the books governing, for instance, "rackets" and "bunko" is quite a significant one arising out of federal "over-ride" of all that quaint, old 1950's stuff and "tasking" -- a euphemism for subsidizing -- newfangled local enforcement of "drugs, and "counter terrorism" programs.
The one continuity is that what used to be the low-level rackets and bunko are now, not so much legal as more respectable from a racial, religious, and academic point of view. Meanwhile, (some) "drugs" and "terrorism" (gun-running) are still illegal commerce largely conducted by the sort of despised racial and religious, socially marginal, types that police typically try to isolate and keep away from respectable people or well established trades.
So, sub-prime lending would be an ordinary matter of political discourse were it not for the rise of "financial innovation" that multiplied and internationalized what would have otherwise been just a replay of the S&L crisis with one shady -- conspicuously Roman Catholic -- lender going to Club Fed for a spell.
That public spectacle then and the bigger one now is more than the usual class or religious bias in law enforcement. It seems to me like total break-down in the military and patriotic order of the Western alliance during the Cold War where even or especially international finance and national economies had some purpose other than enriching the Davos nomenklature and protecting its thuggish mercenaries and academic courtiers.
Granted, some re-regulation and new regulation is warranted. But, there really needs to be a new or, maybe, a traditional constitutional framework for it, not just a bunch of flimsy legalism and political sham negotiated between the complicit supervisory and renegade elements of our Anglo-American overclass.
But indefensibly bad practice was widespread, too, by originators that were lightly regulated or completely unregulated.
So the theory is, if we charge our government with regualating our activities (like fraud, robbery, racism, sexism, tax evasion, etc) or or with declaring war on our activities (like smoking, poverty, drugs) then the activities just go away and don't cause problems?
Sweet.
But indefensibly bad practice was widespread, too, by originators that were lightly regulated or completely unregulated.
So the theory is, if we charge our government with regualating our activities (like fraud, robbery, racism, sexism, tax evasion, etc) or or with declaring war on our activities (like smoking, poverty, drugs) then the activities just go away and don't cause problems?
Sweet.