Mark Thoma on Regulation

Here are some bits from a posting by Mark Thoma on The Hearing blogsite at the Washington Post:

Banking regulation imposed in response to the Great Depression and the recurrent panics of the 1800s and early 1900s gave us 50 years of stability in the financial system without impeding economic growth. That’s quite a record to overcome for those who say regulation does not work.

But the stability began to break down with the savings and loan problems in the 1980s, and the growing instability since that time is evident in the severe meltdown we are experiencing today.

What happened? Deregulation beginning with the Reagan administration combined with financial innovation and digital technology led to the emergence of what is known as the shadow banking system. These are financial institutions that, for all intents and purposes, function just like banks but are not subject to the same rules and regulations and, in some cases, are hardly regulated at all.

...

Today's problems could have been eased or perhaps even avoided entirely if regulators would have simply enforced regulations already in place, or called for new ones when existing tools were inadequate. But instead, regulations were not enforced to the extent they could have been, and there was little internal opposition when they were lifted.

The attitudes within regulatory agencies were driven by the widely held belief that the discipline of the marketplace would not allow the accumulation of excessive risk. Regulators did not believe that the type of meltdown we have just experienced could occur. Problems could develop in individual markets, and those could be troublesome, but the system-wide, falling-domino-type collapse we’ve just observed just couldn’t happen -- not in modern financial markets with all their digital technology, fancy mathematics, and complicated risk-dispersing products. Or so it was believed.

If you don’t believe something can occur, you won’t be sensitive to signs that it might be about to happen. Regulators missed the signs of the crash because they didn’t think a crash of this breadth and magnitude was possible. Besides, more benign explanations could be made to fit the facts.

The pervasive ideology of the Reagan "revolution" has nearly destroyed the US. Some have learned the lesson. But most of the fanatics on the Right refuse to see reality. They live in a fanatasy of ideology where their ideas can never be wrong. The electorate needs to get their "cold dead hands" off the levers of power and return them to moderates, pramatists, and progressives to refashion appropriate governmental regulation. Mark Thoma goes on to outline some ideas for how to re-regulate America.

Here is an article by Geithner and Summers in the Washington Post where the Obama Administration proposes its view on the needed re-regulation. It is too much motherhood and vague "good words" for my taste. It is far too short on specifics. I really don't think these two have their heart in re-regulation. They are simply going through the motions hoping the crisis passes and attention moves on to other things. I've lost pretty well all my confidence that Obama takes the economy seriously.