With all of the recent talk about government intervention in the financial market, it's natural for a liberal to wonder -- "Has the conservative idea of self-regulating, self-correcting markets been discredited?"
I should say, "discredited more". The S&L crisis already did plenty to discredit it twenty years ago. But these ideas have a way of hanging on. The idea of forcible nation-building, for example, was thoroughly discredited thousands of years before the Bush Doctrine was a twinkle in Charles Krauthammer's eye, but there are a few rag-tag survivors in the backwoods world of U.S. Presidential Nominees who still cling to the idea. Like a gun. Or a religion.
To be fair, there is no way of knowing with absolute certainty whether government intervention was needed in the current crisis. We can't go back in time and let Bear Stearns, Freddie Mac, Fannie Mac and AIG fail - so we'll never know for sure whether an almost complete meltdown of credit in the global market would cause any lasting damage, beyond a couple of days or weeks.
So where do we turn if we want to know, with as much assurance as possible, whether conservatives were wrong about deregulation and free-market resilience? I'll tell you where. David Brooks - that's where. Because David Brooks is a real man, and if he was wrong, you can bet your bottom... treasuries interest rate... that he'll tell it like it is.
Slap me some five, David Brooks.
A few years ago, real estate was all the rage. Earlier this year, the business magazines were telling us to invest in Lehman Brothers and Merrill Lynch, because those stocks were bound to zoom. Now another herd is on the march.
We’re in a paradigm shift, its members say. The current financial turmoil marks the end of the era of wide-open global capitalism. Today’s gigantic government acquisitions signal a new political era, with more federal activism and tighter regulations.
This observation is then followed by a string of ethereal gottas and shoulds. We gotta have smart regulation that offers security but doesn’t stifle innovation. We gotta have rules that inhibit reckless gambling without squelching sensible risk-taking. We should limit excesses during booms and head off liquidations when things go bad.
It all sounds great (like buying a house with no money down), but do you mind if I do a little due diligence?
No, I do not mind, David Brooks. If due dilligence is what it takes to corral this stinking herd of bovine wrongness, you just go right ahead and do that diligence that is due.
But for heaven's sake, David Brooks - be diligent.
In the first place, the idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly.
Highly regulated investment banks = extreme suckiness. Lightly regulated hedge funds = relatively minor suckiness. Which would mean that... regulation is causing the suckiness. Could it be?
Better ask EMAC:
The SEC’s moves [to clamp down on naked short-selling] comes fast on the news this week that the SEC has subpoenaed 50 hedge funds to find out if they were engaging in rumor mongering in order to drive down shares in 19 financial companies they had shorted in naked short sales to book a profit.
Oh, yeah. Hedge funds can use short-selling to benefit when a market takes a nose dive. David Brooks must have just forgotten to mention that. Maybe he didn't have his diligence hat on tightly enough yet at that moment in the article.
Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, "were probably the world’s most heavily supervised financial institutions," according to Jonathan Kay of The Financial Times.
In theory... But what about the far-fetched world of reality?
Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.
Weakly, heavily. Whatever. Back to David Brooks.
Moreover, there is a lot of lamentation about Clinton era reforms that loosened restrictions on banks. But it’s hard, as Megan McArdle of The Atlantic notes, to see what these reforms had to do with rising house prices, the flood of foreign investment that fed the credit bubble and the global creation of complex new financial instruments for pricing and distributing risk.
In other words, maybe there is something more going on here than just a bunch of laissez-faire regulators asleep at the wheel. But even if it is true that we need more federal activism, I’m a little curious about what we’re going to need to make the system work.
Tell us, David Brooks. Tell us even if it hurts us like a seven hundred million dollar purple nurple.
Surely, we’re going to need lawmakers who understand what caused the current meltdown and who can design rules to make sure it doesn’t happen again. And yet there’s no consensus about what caused this bubble.
Some people blame the Fed’s monetary policies, but some say the Fed had only a marginal effect. Some argue a flood of foreign investment allowed us to live beyond our means, while others say bad accounting regulations after Enron created a chain reaction of losses.
We don’t even have a clear explanation about the past, yet we’re also going to need regulators who understand the present and can diagnose the future.
Okay. Let's say I was a Financial Market Regulatin' Guy; and let's say that I got some arugula in my Caesar salad by mistake or something, and it put me in a totally un-Phil-Grammlike mood, and I decided to put me a regulatin' on some swap derivatives. What kind of regulatin' might suit my fancy at this poignantly cruel moment in time?
I can tell you what kind. The reportin' kind. Not only would I come up with some sadistic way of quanitfying risk, I would procrusteanically force everyone to report it the same way.
Then I would put me a serious knowin' on the present.
We’re going to need regulators who can anticipate what the next Wall Street business model is going to look like, and how the next crisis will be different than the current one. We’re going to need squads of low-paid regulators who can stay ahead of the highly paid bankers, auditors and analysts who pace this industry (and who themselves failed to anticipate this turmoil).
We’re apparently going to need an all-powerful Super-Fed than can manage inflation, unemployment, bubbles and maybe hurricanes — all at the same time! We’re going to need regulators who write regulations that control risky behavior rather than just channeling it off into dark corners, and who understand what’s happening in bank trading rooms even if the C.E.O.’s themselves are oblivious.
I think what David Brooks is saying here is that what we "need to make the system work" is "an all-powerful Super-Fed than can manage inflation, unemployment, bubbles and maybe hurricanes".
Unless he is cleverly employing hyperbole for dramatic effect. In which case, he is saying something more like, "unless we are superhuman and all-knowing, it is not possible to regulate the system in a way that will guarantee no future crises".
And since we can't do it perfectly, it's obviously useless to try doing it at all.
David Brooks -- I think I speak for all of us when I say that you made that argument your bitch.
We’re also going to need regulators who can overcome politics and human nature. As McArdle notes, cracking down on subprime loans just when they were getting frothy would have meant issuing an edict that effectively said: "Don’t lend money to poor people." Good luck with that.
Seriously. Because, as we all know, poor people are much happier when they are lent money that they can't possibly repay by kind people who just want to help them and/or place a side bet that they will default than they would be if they had never had a brief taste of a totally unaffordable home before it was snatched away from them.
Why do you hate poverty?!?
We’d need regulators who could spot a bubble and squelch a boom just when things seem to be going good, who can scare away foreign investment and who could over-rule popularity-mongering presidents. (The statements by the two candidates this week have been moronic.)
(And both candidates just happened to be alive during the Clinton era. Coincidence?)
To sum it all up, this supposed new era of federal activism is going to confront some old problems: the lack of information available to government planners, the inability to keep up with or control complex economic systems, the fact that political considerations invariably distort the best laid plans.
Unless we can find some way to bring the full firepower of not-paying-any-attention-whatsoever to bear on these vexing problems.
Ah. If only we had the perfect solution! Then we would not be doomed to a life of merely being sarcastic.
But wait. David Brooks has not given in to despair.
This doesn’t mean there’s nothing to be done. Martin Wolf suggests countercyclical capital requirements. Everybody seems to be for some updated version of the Resolution Trust Corporation, though disposing of complex debt securities has got to be more difficult than disposing of commercial real estate.
Here we were thinking that we'd need meteorological government regulators, when all we really need is a government corporation like the one that cost taxpayers ten times what the private sector absorbed during the S&L crisis, and some of those countercyclical captital requirements that Greenspan always thought were such a good idea.
Good thing we got those capital requirements pushed through when exuberance was at its most irrational.
[cross-posted at spoonerized alliterations]