Let There Be Regulations

It took so long into this New York Times story about congressional efforts to bring some regulatory oversight to the unregulated elements of Wall Street that it actually brought a smile to my face when we finally arrived at the inevitable "But industry groups warn..." part of the article. After all, I was curious, what will industry groups warn? What dire menace would it propose to the Republic if financial institutions that get bailed out like banks when they go bust, and now get access to the discount window like banks, also get regulated like banks before they do things that could force the government to step in and clean the mess? What should a politician eager to the bidding of firms who've bribed him pretend to be worried about?

The answer is: But industry groups warn that heavy-handed regulation could dry up investment capital just when the economy needs it most.

Because, of course, had new regulations been proposed 18 months ago, industry groups would have leapt at the chance. But now's not the right time!

Comments

Was the regulation posed 18 months ago? I just wonder whether it was so obvious what was about to happen with Bear Stearns, etc.

Posted by Questioner | March 23, 2008 3:17 PM

And-- right now would be a great time to cut taxes, too.

Posted by MattF | March 23, 2008 3:33 PM

That's the great thing about plutocratic solutions: they never vary.

"Give us more."

Posted by Jeffrey Davis | March 23, 2008 3:41 PM

1)The thing that really hurts the people of this country is that the very Democratic leaders who claim to be looking out for the little guy end up whoring for the same rich men the Republicans
fellitate.

2) Why aren't Democratic leaders on the Sunday Talk raising pure holy hell over how George Bush and the past Republicans CAUSED THE CURRENT DISASTER -- where we either fall into a Great Depression or else we have to open up the US Treasury and let the same irresponsible greedy Wall Street Assholes who caused the current disaster load up hundreds of $Billions??

3) And why the fuck can't anyone point out that John McCain is a REPUBLICAN!!!

Posted by Don Williams | March 23, 2008 3:42 PM

Left unstated by Matt: a large part of the credit/mortgage problem is due to progressive pushing 15 years ago to "loosen up" lending criteria due to "redlining" problems. Now we learn that perhaps the lenders were correct in the first place; premising a loan on the ability to repay rather than on progressive principles of "equality" might make sense.

However, rather than just allow a rollback to the status quo ante, we'll get a whole new set of charges about racist banks and how they are hurting the poor with all these foreclosures.

Here's a tip: maybe you should stop trying to "help" the poor. I rather suspect they would be better off without your kind of help.

Posted by James Robertson | March 23, 2008 3:47 PM

Shorter James Robertson: the niggers did it.

Posted by xyz | March 23, 2008 3:56 PM

1) Gee, I just got a SLIGHT INKLING on why the Democratic leadership is staying so fucking quiet.

2) I read the New York Times article on the origins of the current economic goatfuck -- see
http://www.nytimes.com/2008/03/23/business/23how.html?_r=1&hp&oref=slogin

3) On page 2 of that little story, I see this:

"A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.

Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill."

4) You all remember Fat Phil the Texas Porker, don't you? The Senator who waved gaily to tens of thousands of bankrupt constituents --employees of Enron -- as he skipped gaily off into a post-Senatorial sinecure at financial services firm UBS. Supplemented by that lavish Senatorial pension and the $1 Million or so that his wife Wendy picked up as a Director at Enron where she exercised such "strict oversight".

5) But I wondered how Fat Phil slipped such as Christmas gift through under cover of darkness -- and see : "It was signed into law by President Bill Clinton that December."

6) Ha ha ha ha. I'll bet Wall Street was kinda grateful to Ole Bill for that signature. To see HOW GRATEFUL we probably would need to look at the Clintons' tax returns for the past several years.

The Tax Returns that Hillary has REFUSED to release.

Posted by Don Williams | March 23, 2008 3:57 PM

The actual dynamic at play is that the financial industry does not really have a preference between New York and London, whereas the U.S. government does.

Posted by Senescent | March 23, 2008 4:16 PM

a large part of the credit/mortgage problem is due to progressive pushing 15 years ago to "loosen up" lending criteria due to "redlining" problems.

You are so right. And then the problems somehow went unnoticed and unremarked on for fifteen years, including seven years in which Republicans controlled both Congress and the White House. Too bad to those cautious and fiscally prudent GOPers couldn't stop the damn n*gger-loving Democrats from forcing the investment banks, at gunpoint, to leverage those shaky loans into positions that threatened the stability of the entire financial industry.

Give me a f*cking break, James Robertson.

Posted by James Gary | March 23, 2008 4:18 PM

Left unstated by Matt: a large part of the credit/mortgage problem is due to progressive pushing 15 years ago to "loosen up" lending criteria due to "redlining" problems. Now we learn that perhaps the lenders were correct in the first place; premising a loan on the ability to repay rather than on progressive principles of "equality" might make sense. - James Robertson

Actually, in some cases, what we're seeing is redlining ... people who actually had the ability to pay for regular loans have been refused them because they were "higher risk" (and how would that decision be made?) but were offerred loans that they in fact couldn't repay (but made to look like they were cheaper).

Of course, it would make sense if loans were actually being made on the basis of ability to repay. But the campaign against redlining was, um, a campaign that loans should be made based on ability to repay rather than other factors.

Nowadays, instead of being made on ability to repay, loans are made based on arcane credit scores with little predictive value (and people are making money off of collecting our information -- and we have to jump through hoops to get ahold of that information ourselves?!?) that somehow everyone believes in. Why not actually just, um, have loan applicants document their ability to repay a loan on given terms and leave it at that?

It's so simple -- yet it just ain't happening. Sometimes it's redlining. Sometimes it's a willfull desire to force people into loans with a higher risk to the lender but the hope of higher interest rates. And sometimes it's just stupidity and laziness (who wants to think about what loan a prospective borrower can afford when you can look at a "credit score" rather than extensive documentation of a borrower's budget).

But it ain't that if only we allowed banks to redline, we wouldn't be in this mess. The fact is that redlining and generally excluding people from loans they could repay -- and those people then getting loans they can't repay (but look like good deals), is what caused this mess!

Posted by DAS | March 23, 2008 4:54 PM

"You are so right. And then the problems somehow went unnoticed and unremarked on for fifteen years, including seven years in which Republicans controlled both Congress and the White House."

This may come as a complete shock to you, but Bush and Clinton didn't disagree on every single policy goal. Two goals they both shared were increasing the percentage of home ownership in America, and specifically increasing the percentage of minority home ownership. That's why Bush did nothing to roll back the Clinton-era policies of encouraging laxer lending standards.

That said, going back to Matt's post, if access to the Fed's discount window is made contingent on accepting some level of increased regulation (e.g., of capital requirements) that would seem to be a reasonable quid pro quo. The danger of rushing to regulate areas where the market has already obviated the need for quick solutions (e.g., lending standards -- there's no longer any epidemic of lenders giving out no-money-down NINJA loans) is that of unintended consequences. If the government goes too far in the opposite direction, it may end up increasing mortgage interest rates and reducing the availability of credit to the middle class in the near future.

Posted by Fred | March 23, 2008 4:58 PM

The answer is: But industry groups warn that heavy-handed regulation could dry up investment capital just when the economy needs it most.

Are our markets really so undercapitalized?

Posted by DAS | March 23, 2008 5:04 PM

One would think that the added security and protection from risk of melt-down would enhance investment rather than discourage it.

Seems to me that there was plenty of investment in the world's largest economy in the 60ish years that Great Depression regulations were in place.

Posted by Ethel-to-Tilly | March 23, 2008 5:11 PM

Seems to me that there was plenty of investment in the world's largest economy in the 60ish years that Great Depression regulations were in place.

Posted by Ethel-to-Tilly

Such statements are about things which are are all in the past and are unhelpful to us now. What is important now is that we all clap louder so that the people and ideologies which got us into this mess now get us out!

Posted by El Cid | March 23, 2008 5:28 PM

With bedrock interest rates, what's a lender who wants to make a bundle to do? Answer: write a lot of loans.

Posted by Jeffrey Davis | March 23, 2008 5:58 PM

Yeah, geez, look at the toxic and damning effect that the SEC and the Fed have had on markets over the last seventy years. If only we hadn't had them around, interfering with free markets, we wouldn't have any of these problems.

Posted by Steve Roth | March 23, 2008 7:13 PM

This may come as a complete shock to you, but Bush and Clinton didn't disagree on every single policy goal....that's why Bush did nothing to roll back the Clinton-era policies of encouraging laxer lending standards.

Granted. I am neither an economist nor an investment banker, but, to clarify my points as I understand them:

1. If the high default rate on loans was a result of Clinton-era legislation, banks had fifteen years to complain about it, which they simply didn't do.

2. The root of the present trouble is not that risky loans were made, but that those loans were unwisely used as assets against which massively leveraged speculation occurred. To blame the original borrowers seems analogous to a contractor using what's clearly labeled as poor-grade lumber and, then, when the building later collapses, blaming the supplier.

Posted by James Gary | March 23, 2008 7:19 PM

James Gary,

"If the high default rate on loans was a result of Clinton-era legislation, banks had fifteen years to complain about it, which they simply didn't do."

The banks mostly bailed on the marginal neighborhoods, ceding them to stand-alone mortgage companies (an early unintended consequence). The stand-alone mortgage lenders didn't hold loans -- they sold them in the secondary market to be securitized (a market created and supported by the federal government with its GSEs).

"The root of the present trouble is not that risky loans were made, but that those loans were unwisely used as assets against which massively leveraged speculation occurred."

Eh, not exactly. The risky loans wouldn't have been made by traditional lenders that would have had to hold the loans. And the complex mortgage backed securities that these loans went into weren't really about speculation, for the most part, but about turning the surfeit of mortgages in the secondary market into something useful, income-producing securities for institutional investors such as pension funds. In theory, that made sense, and in fact, many of these securities are probably worth a lot more than their current prices, even if they were never worth their face prices (as seems to be the case now). Some institutional investors are starting to realize this, and are tentatively starting to buy again. See, for example, " Pension plans take chance on mortgages".

Posted by Fred | March 23, 2008 8:35 PM

Fred-Thanks for the info. What you wrote sheds quite a bit of light on the subject to a total novice like myself.

Do you think that tighter regulation of the secondary market in mortgage-backed securities might've prevented the current crisis, or did the problem lie in borrowers with marginal credit being given the loans in the first place?

Posted by James Gary | March 23, 2008 9:00 PM

James Gary,

You're welcome. In hindsight, two of the big conflicts of interest that stand out in the system were the mortgage originators (mainly the stand-alone mortgage lenders) not having any skin in the game once they sold their loans and the rating agencies getting paid by the issuers of complex mortgage backed securities. In the second case, existing regulations exacerbated the problem to some extent by limiting the number of approved bond rating agencies to a small oligopoly, but different regulations, or the institutional buyers of these securities demanding more independent rating agencies, would have helped. Had so many of these securities not been rated triple-A, institutional buyers would have done more due diligence and they would have been more accurately priced initially.

With respect to the first case, of mortgage originators not having any skin in their loans when they sold them, it would have helped if these originators had had part of their compensation for selling loans deferred and tied to the default rates from their loans after five years. This could have been accomplished by regulation, or by the buyers of their mortgages in the securitization market demanding it.

Posted by Fred | March 24, 2008 1:35 AM