tag:blogger.com,1999:blog-1331441403058020963.post7953757875214143033..comments2024-03-28T06:49:24.930-04:00Comments on International Political Economy at the University of North Carolina: Pounding Away at the Deregulation ZombieThomas Oatleyhttp://www.blogger.com/profile/14092437150746625670noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-1331441403058020963.post-71451505260819104832010-10-13T03:12:11.180-04:002010-10-13T03:12:11.180-04:00...
Ultimately the subprime crisis was so bad bec......<br /><br />Ultimately the subprime crisis was so bad because the bubble was so big. In my opinion there are about 20,000 different reasons for why the bubble was so big, and so why the crisis was so deep. Lax regulations was probably one of them, but regulatory arbitrage was another. Eliminating the "Recourse Rule", for example, might have had a much bigger prudential effect than trading derivatives on exchanges. Hell, not forcing banks to mark to market might have prevented some of the stampede that sank Lehman. <br /><br />You're right that the political economy angle is about competition, power, and interest groups, and that that is the interesting stuff. That's what my dissertation is focused on, albeit in the early stages. A brief discussion of part of that is here:<br /><br />http://ipeatunc.blogspot.com/2010/09/basel-is-about-politics-not-technocracy.html<br /><br />But to me, Johnson's "13 bankers stole the country" narrative is way too simplistic, as is the "neoliberals deregulated everything and then it went boom" narrative, and the "government caused it by encouraging lending to poor people" narrative, etc. Knocking down those straw men is necessary to get at the real meat.<br /><br />So my prior is that all simplistic narratives are wrong, and all regulatory regimes are prone to failure. My prior is that the causes of crises (and regulations) are political, but no politician from any party wants to destabilize the financial system, so we need to deeper causes. My prior is that U.S. regulators operate within an international context that is meaningful for understanding outcomes. <br /><br />And I don't really care what Greenspan thinks. If he didn't know what he was talking about before why should I assume that he does now? He's a smart guy, but he's always had a too-high a view of his capabilities. He thinks he could have prevented the crisis. I don't.Kindred Winecoffhttps://www.blogger.com/profile/14330671232391851377noreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-16650089383803243832010-10-13T03:11:46.206-04:002010-10-13T03:11:46.206-04:00Mea culpa on Johnson's IMF record. Not sure wh...Mea culpa on Johnson's IMF record. Not sure why I thought that, but it guess it serves me right for making an unnecessary passing swipe.<br /><br />Clearinghouses: In theory that's right, but no one is really sure how clearinghouses will work, or would have worked. Was the problem about transparency? In Sept. 2008 it was, at least in part. In 2004-06 it was not. By the time increased transparency could have helped it was likely too late. <br /><br />In any case, increased transparency could have made things much worse by exacerbating runs on the weak firms. Remember when the Fed made *every* major bank take TARP funds to hide which were on the brink of insolvency in order to protect them from runs? (I thought I'd blogged that at the time, but can't find it now.) If investors (including other firms) know which firms are weak they'll kill them, and since all of these big firms are inter-connected that could still lead to a system-wide run that would sink even healthy banks. Increased transparency could conceivably be worse than opacity in a bank run. <br /><br />The point is that we don't know whether exchanges would have helped, or how much. I tend to think they are a good idea, but I also don't believe that they would have been enough to halt "amplification". In an asset bubble it seems doubtful that creating a bigger market for the bubbled asset would deflate the bubble. I don't know that is true of course, but I think it's the most likely case. Counterfactuals are very hard in this case, which is why I tend to take the view that scapegoating and demagogy aren't productive.<br /><br />Regarding the burden of proof... It seems clear enough to me. There is a simple, empirical question: Did the U.S. deregulate from 1980-2008? The answer is: No, on balance it did not. The regulatory structure shifted in several ways, but in general regulations concerning capital, accounting, and disclosure were made stronger over that period. So it's quite easy to assess a claim like "there was 'more' regulation". There was. <br /><br />Was that regulation as effective as in previous periods? Well, that's a completely different question. From 1982-2000 we had about seven different financial crises in the U.S., or one every 2.5 years or so. Some worse than others, and none as bad as the subprime crisis, but crises nonetheless. From 2000-2008 we had none, then the big one. It's not at all obvious from the historical record what regulatory structure is best.<br /><br />http://ipeatunc.blogspot.com/2010/10/revisionist-history.html<br /><br />And that's just in the US. Globally, financial crises have hit countries with all sorts of regulatory structures over the past 3 decades. So it's hard for me to have much confidence in any particular regulatory regime. <br /><br />...Kindred Winecoffhttps://www.blogger.com/profile/14330671232391851377noreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-474963986340812822010-10-13T02:16:28.348-04:002010-10-13T02:16:28.348-04:00johnson was *chief economist* at the IMF 2007-2008...johnson was *chief economist* at the IMF 2007-2008...a long long time after the summers v stiglitz asian crisis days...(stan fischer was first deputy man dir at IMF then)<br /><br />the point about the transparency of clearinghouses is that people understand where the risks in the system are. the crisis is not only about housing, but about the mechanisms which allowed amplification of a subprime into credit and (global) financial crisis. and derivatives and leverage are intimately related to amplification.<br /><br />i really find it odd where you think the burden of proof is here. regulation should always be thought of relative to the technology and rest of the institutional setting. I can't assess something like "there was `more' regulation". Regulation shouldn't be about more or less, and maybe that is where the people you criticise go wrong. answering this question properly requires a careful study of the legislative history (related to HMDA, gramm-leach-bliley, Commodities futures modernization, BAPCPA, even things like the new jersey and georgia predatory lending statutes etc etc) and looking at the role of lobbying. It's plausible that regulations (and enforcement) were less stringent than they would have been but for `faith in the markets' rhetoric (we had defeated communism after all) from favored campaign donors. Isn't that where the political economy is? <br /><br />When you ask: What should the regulation have looked like? Well, we have a better idea now. But, maybe we didn't even need more - maybe a Fed, a (well-funded) SEC and CFTC that believed in regulation would have been enough. (and not letting systemically important firms pick their regulator would have helped).<br /><br />and maybe politically it takes a big crisis to get regulatory changes /changes in enforcement which ex post are sensible. but greenspan appears to think that too much was left to financial institutions to develop their own self-regulatory frameworks and that maybe he could/should have done more. Seems sensible to start with that prior rather than the reverse.<br />-Larry.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-21788144299278107322010-10-13T00:49:46.392-04:002010-10-13T00:49:46.392-04:00Larry -
As you say, there are sins of omission an...Larry -<br /><br />As you say, there are sins of omission and sins of commission. Charles Ferguson (and his ilk) are claiming the sin is one of commission: a history of deregulation. You are claiming the sin is one of omission: a history of "un"regulation. <br /><br />Ferguson is wrong. Whether you are right or not is up for you to prove, not me. (FWIW, I think you probably are right, but I also think that there is basically nothing that could have be done on the regulatory side -- within reasonable parameters -- to prevent this crisis.)<br /><br />It's been awhile since I read Johnson's Atlantic piece, so I don't remember the specifics. I'll try to re-read it sometime, maybe tomorrow. But in general I think Johnson almost always overstates his case. Here's how I'd respond in brief:<br /><br />1. Ironic that the former head of the IMF during the Asian financial crises is critical of free capital movement. In any case, is there any evidence that this caused the crash? Or even had anything to do with it? 2008 was not 1997. This wasn't a "hot money" crisis. <br /><br />2. Glass-Steagall is the thing that always gets tossed around, but never with any causal mechanism attached. How did G-S repeal cause the crisis? Why was the event touched off by Bear and Lehman (and Fannie/Freddie), which were not mixed firms? Why did JP Morgan Chase -- a mixed firm -- perform the best during the crisis? Remember that Morgan Stanley and Goldman were saved only by *becoming* mixed firms. WaMu and Wachovia, more traditional commercial banks, didn't make it. None of these are explainable from the viewpoint that G-S repeal caused the crisis.<br /><br />3. What CDS regulation, specifically, would have prevented the crash? (More on this below)<br /><br />4. There might be some "there" here, but I view the crash being caused by a liquidity crunch that triggered a run on less-liquid banks and their counterparties. Leverage is related to that, but the same could have happened if banks hadn't levered-up 30 to 1. <br /><br />5. I fail to see how the observation that regulators performed badly supports the argument that we should give them much more authority. This also applies to #4, if you like.<br /><br />6. Self-assessment of risk came about because no gov't agency was/is qualified to do it. It was a pragmatic decision, not an ideological one. Anyway, I think it's wrong to phrase Basel in those terms. For more of what I think about Basel search for "Basel" on the blog. Basel is about politics. <br /><br />Inaction on derivatives is probably the elephant in the room, but that's a sin of omission, not commission. It's not like derivatives were regulated by Jimmy Carter and then Reagan reversed it. They were never regulated, so they couldn't've been deregulated. <br /><br />Furthermore, I always hear people say "we should have regulated derivatives" but I never hear them say *how* we should have done so. Isn't that the important part? Born wanted to put them on exchanges. A good idea, I think, and I'm glad FinReg does it. But does anyone really think that would have prevented the crisis? I've never seen anyone make a remotely persuasive case.<br /><br />More importantly, none of these challenges my central claim, which is that the regulatory structure was strengthened during the Reagan-Bush-Clinton-Bush years. Perhaps it wasn't strengthened enough, as Greenspan acknowledges, but that's a separate argument. And those who make it need to say what should have been done, *and* how that would have fixed the problem.Kindred Winecoffhttps://www.blogger.com/profile/14330671232391851377noreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-91099249705226414062010-10-12T23:48:13.097-04:002010-10-12T23:48:13.097-04:00Also, can you address the Greenspan quote:
"...Also, can you address the Greenspan quote:<br /><br />"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."<br /><br />How are we supposed to interpret this, except as, I should have regulated banks more?<br />~LarryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-23982606749806311162010-10-12T23:39:06.123-04:002010-10-12T23:39:06.123-04:00Since we're doing blame, we want to get biblic...Since we're doing blame, we want to get biblical on this, "So whoever knows the right thing to do and fails to do it, for him it is sin." James 4:17(ESV). But maybe sometimes they knew not what they were doing so deserve our forgiveness.<br /><br />But simon johnson, in his piece for the atlantic, identifies 6 sins of commission which I think you need to address (these are his views, not necessarily mine) i) insisting on free capital movement; ii) glass-steagull repeal; iii) congress banning regulation of CDS; (iv) leverage constraint lifted by SEC; (v) light touch SEC regulatory enforcement; vi) Basel being hijacked to allow self-assessment of risk.<br /><br />We can add inaction on derivatives and the Brooksley Born story and some other things. He also makes the general point about regulation not keeping up with changing market conditions, and notes the outsized campaign contributions from finance to congress. Even if you don't want to say "deregulation" can you agree to "bad regulation", perhaps influenced by an overly powerful interest group? <br />~Larry.Anonymousnoreply@blogger.com