Wednesday, April 28, 2010

David Brooks on financial regulation

From David Brooks via Greg Mankiw:
Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general. ...

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.
Some Bubble Meter readers may think that I oppose financial regulation. Quite the opposite, I support it. But, there's a difference between effective regulation and ineffective regulation. I believe some parts of the proposed financial reform bills—such as a Consumer Financial Protection Agency—are an improvement on the current system, but I fear the bill may be mostly ineffective. Democrats are too prone to believing in the ability of government bureaucrats to spot trouble before it occurs. At the same time, some simple and important policies—such as requiring banks to issue contingent convertible bonds, banning teaser rates, and requiring home buyers to make sizable down payments—are missing.

Note: Despite David Brooks' claim, home builders didn't help create the bubble. They simply took advantage of it. By increasing the supply of housing, they were actually acting to suppress the bubble.


  1. David Brooks is a political animal with a purely political agenda. He has no interest in or prescription for financial regulation. He's an expert in exactly nothing. All he cares about is sounding "reasonable", then coming to a conclusion that coincidentally coincides with the most recent RNC talking points.

  2. The general problem with regulatory solutions is that politicians fail to foresee the dangers of regulatory capture by the industries effected. They also invariably embed grotesque conflicts of interest into the laws such that the bureaucrats tasked with regulating are incentivized to do a poor job. I see nothing in the bills before Congress that address this. Giving the Consumer Financial Protection Agency functions to the Fed is a perfect example of this.

  3. It's always amusing to watch a completely bought Beltway courtier (or is it jester?) like Brooks cluck on about "the political class", as though he's somehow outside of it.

    Little Davey is just doing what he does best, poisoning the water, in order to carry water for the wealthy and connected. Regulation might crimp their power -- best to get one of their reliable lickspittles on the case, to belittle the very **idea** of regulation.

    Never forget that Little Davey's inane "Bobo's in Paradise" has been shown to be largely fabrication. Never forget that Little Davey tossed all his supposed scepticism about "the political class" aside when we launched our glorious Iraq adventure. David Brooks is nothing more than a well-paid professional liar, a person with **zero** integrity or honesty.
    -- sglover

  4. What is the best, fast, and cheapest mitigation technique that has never been on the table?

    Personal Liability is the best mitigation technique.

    I would love to hear just ONE convincing argument why personal liability isn’t the best risk mitigation technique.

    There is no better check and balance than Personal Liability…yet corrupt leaders in their thousands of hours of hearings and pages of rules never use this accountability tool. Personal Liability
    1. proactive vs. reactive
    2. constrains risk taking
    3. reduces the need for government involvement
    4. allows for free market flow
    5. produces accountability
    6. concentrates the best interest by hanging personal financial loss over boards and management

    It is not difficult to see this self regulating tool would provide a layer of capital from the boards management and highest paid employees and politicians.