David R. Henderson  

A Great Paragraph from Arnold Kling

PRINT
Henderson on the 2016 Nobel Pr... Why it's so hard to figure out...
Now, journalists want to paint Greenspan as a great free-marketeer, as if he spent his career fending off cries for more financial regulation. In fact, there was a consensus in the 1980s that inter-state banking had to arrive and that the Glass-Steagall separation of investment banking from commercial banking was being eroded by innovation. The deregulation that ratified these changes would have happened under any conceivable Fed chairman at that time. Moreover, the deregulation was accompanied by what banking officials were convinced at the time were stronger and more effective regulations regarding safety and soundness. They were particularly proud of risk-based capital regulations, and it was the market-oriented economists of the Shadow Regulatory Committee who warned that those were not adequate to prevent a crisis.
This is from Arnold Kling, "The Greenspan Fed," October 11, 2016.

Comments and Sharing


CATEGORIES: Regulation




COMMENTS (6 to date)
Michael writes:

no it isn't. It's from Arnold Kling, at least according to your link

whomthen seems to go all Austrian on Scott Sumner

David R. Henderson writes:

Changed. I was thinking about his critique of Scott, even though that’s not the part I was posting about, and was in a hurry while watching my SF Giants lose. Sorry.

Kevin Erdmann writes:

The main source of collateral for commercial banks - real estate - declined in value by more than 25% nationally. A multi sigma event by any measure. The idea that banks would have sailed through that dislocation if only they had been properly regulated is not reasonable. And blaming it on the bubble which is in turn blamed on the banks is begging the question. Several major countries had housing booms without the subsequent bust. The bust is what made us different and the boom clearly was an event that was broader than one country's regulatory structure.
Using this episode as a reason to reconsider financial regulations is like questioning your nutritionists advice because you caught malaria.

Shayne Cook writes:

Hi Kevin:

You stated:

"The main source of collateral for commercial banks - real estate - declined in value by more than 25% nationally. A multi sigma event by any measure. The idea that banks would have sailed through that dislocation if only they had been properly regulated is not reasonable."

Very well stated ... however ....

As you know, it was not just "Commercial" banks for which real estate was the underlying collateral. It was (primarily) the "Investment" banks AND "Insurance" services firms' underlying collateral as well!

And notwithstanding the 1999 Gramm-Leach-Bliley legislation, the Fed (Greenspan) had NO statutory authority to either regulate, or effect any direct (financial) support to, ANY non-depository/non-"Commercial" (Investment, Insurance) enterprise or operations of combined-services "banks", or "bank holding companies".

As an aside, I also tried to make this point in a comment (to a commenter) on Arnold's original post, cited here by Henderson.

As a further aside, I also concur (at least in concept - I don't generally care for analogies) with your last statement:

"Using this episode as a reason to reconsider financial regulations is like questioning your nutritionists advice because you caught malaria."


Andrew_FL writes:

Michael, you say that like it's a bad thing

Kevin Erdmann writes:

Shayne, yes. I agree. Policymakers explicitly stated throughout 2007 and 2008 that they couldn't engage in broad accommodation because that would let speculators off the hook and create moral hazard. IOW, prices had to fall and banks had to fail before we could stabilize the nominal economy.
You could say that the reason we had such a bad recession is that the banks were so resilient that we had to have a collapse in GDP growth and a 25% drop in home prices before the banks hurt enough for us to accept stability.
Then, since we were convinced that lending had been the problem, we continued to pressure lending on low priced homes after late 2008. That's when most of the defaults and most of the price declines at the low end happened.

If the banks had collapsed in early 2007, we might be better off. You could say the resiliency of the banks is the reason the crisis became so severe.

Comments for this entry have been closed
Return to top