Arnold Kling  

Financial Regulation in Hindsight

In Defense of Low Correlations... Audience Questions...

My views are here.

I am also skeptical about the claim that we needed a "systemic risk regulator" to prevent the crisis. This would be true if most of the financial damage could not have been prevented by any individual regulator. However, the fact is that the Federal Reserve, which regulates most of the nation's largest banks, had enough power to prevent bank failures with better capital regulations. Preventing failure at Freddie Mac and Fannie Mae also did not require a systemic risk regulator--what was needed was tighter supervision by the Office of Federal Housing Enterprise Oversight, which regulates those institutions. That in turn would have required support from Congress, which generally was instead more prone to tampering with the regulator than with the housing enterprises it was supposed to regulate.

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COMMENTS (4 to date)
BL writes:

I read the whole thing on the WaPo's website and all I have to say is: Well done. Unfortunately, no one in power in today's mess that is Washington will do anything resembling what you wrote. Instead, they'd rather spend time using the crisis to consolidate even more power and name czar after czar to head some polit bureau-esque agency.

Harkins writes:

a good summary of events

spencer writes:

Believe it or not I agree with you.

Financial panic are inherent to financial market capitalism and seem to be a generational thing of overshoot and changes in mass or mob psychology.

There was a generational shift in the 1980s-90s in favor of deregulation that no one individual or institution would have been able to surmount. I'm old enough that my original training in finance was by people who lived through and remembered the depression. Through the 1970s attitudes were shaped by those who experienced the depression. But that passed from the scene and everyone came to see the lessons learned in the depression as unnecessary restrictions.

It is like one of my favorite bromides from the depression that the most dangerous thing in the world is an intelligent banker.

The overwhelming bulk of comments we see about it is simply Monday morning quarterbacking that has little basis in reality.

Dan Weber writes:

I'm not sure you were fair to the proposal to trade CDS on an exchange. I don't think the exchange would have necessarily prevent AIG from taking on so much risk; rather, it would have provided visibility to people what AIG was doing. Of course, you could point out that AIG's partners knew AIG could never cover and were planning on rescue by the government.

I think you're right about the super-regulator never happening.

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