Arnold Kling  

An Interesting Editorial

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In The Washington Post.


when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance. Congress did not apply this sound principle to Fannie Mae and Freddie Mac; they were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee.

This is the first time I have seen "capital requirements" mentioned in the mainstream media. In my view, capital requirements are the number one reason that the convoluted process of mortgage securitization emerged in the first place. See more fantasy testimony.and the fantasy testimony continues.

The media needs a narrative of villains, victims, and heroes. That is why the dominant narrative has greedy executives and right-wing deregulators (villains), even though capital requirements were what drove securitization. That is why the dominant narrative has homeowners burdened by mortgages, when in fact more than 15 percent of mortgage loans in recent years were for non-own-occupied homes. Moreover, even the owner-occupants were speculators, in the sense that they put almost nothing down. Trying to paint as a victim someone who put nothing down and got a big house to live in as a result is really stretching things. Finally, the media wants Henry Paulson and Ben Bernanke to be heroes. In fact, they are increasing the discrepancy between concentrated power and dispersed knowledge.

Anyway, the Post editorial concludes:


Government-sponsored, upside-only capitalism is the kind that's in crisis today, and we say: Good riddance.

That is what I would have said before Paulson came to the rescue. Now, I think that government-sponsored, upside-only capitalism is the only game in town for the foreseeable future.


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COMMENTS (2 to date)
Sam Wilson writes:

I completely agree with you that government sponsored, upside-only capitalism is the only game in town at the moment. What is happening now with the recapitalization of the banks, the overnight lending guarantees and all the rest is simply a repetition of what was done with Fannie and Freddie except that this time it is not implicit, it's explicit.

How is this "fixing the situation"?

I don't know if I would call capitalization the bogie-man here. In my opinion the banks were skirting their capital requirements through securitization when the engaged with unregulated counterparties that they failed to do proper due-diligence on.

Their regulators failed to deliver by holding them to proper account. If everyone had been playing honest here and made sure they were legitimately capitalized there would have been a lot less lending and this bubble would not have been so big. Our banks would not have been stretched so thin and so the correction would have been smaller and the failures would have been fewer.

No regulation is not the answer. Making sure you have good regulations and then having adequate oversight and enforcement are an important part of the process.

John writes:

"Capital Requirements?" First time? Really?


"Capital Requirements" shows up more than 2900 times in the last week by Google news count:

http://news.google.com/news?hl=en&um=1&tab=wn&q=%22capital+requirements%22&ie=UTF-8&as_drrb=q&as_qdr=w&as_mind=13&as_minm=10&as_maxd=20&as_maxm=10&nolr=1

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