4 ms·

The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A Chicago school economist

by bonaldi 17y ago

The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A Chicago school economist decides that the cause of the crash was regulation, there's a surprise. It's difficult not to ad hom him here, but the article drips with scare quotes, special pleading, straw men and appeals to authority, so what's one more fallacy? In fact, although I imagine he wants it to be taken seriously, it reads like little more than an angry forum comment dressed in academic robes. He's obviously heated and insulted by Krugman, and given that Chicago is broadly seen as discredited by the recent crash he is also concerned for his image, and is responding in kind. The real economic lessons of the past few years are not to be found here, or anywhere. They will emerge in years to come. The difficulty is we only have the ability to really push through changes and learn from them now, so everyone's trying to be a part of that action. At least it's clear from both Krugman and Cochrane that the incentives enjoyed by bankers are very badly designed, and that's one issue we can address.

Perceval 17y ago
>A Chicago school economist decides that the cause of the crash was regulation I don't think that's the point he was making with that quote. What he was getting at was that extensive regulation and oversight did not stop the problem from occurring in that sector. Ergo, extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems. If our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.
- bonaldi 17y ago
  Yes, I can see your reading of it now. But I think it would be disingenuous of him to make that claim, given the repeal of Glass-Steagall and the large reductions in regulation that allowed the problems in banking to be exacerbated (though this claim is itself questioned by other economists). A position that regulation either failed or was absent from banking adds a third choice, which isn't far from Krugman's: 3) better government intervention and fewer problems.
  - jerf 17y ago
    Have you seen the charts of the amount of banking regulation per year, as measured in lines of regulation? I wish I could Google it up. The repeal of Glass-Steagall isn't even a blip in the graph, IIRC. It might be lines of above-average importance, but net-net the Bush administration continued piling on the regulations at pretty much the expected rate; I doubt a Democrat would or could have done much more. The other major problem is that it wasn't regulation that failed, it was regulators. Many regulations that already existed weren't enforced. Looking at the rate of regulation increase it isn't hard to see why. How do you propose to solve this problem with more regulations? There's a real engineering problem here or even a computer science-style information theory problem with information flows totally exceeding the ability of the processing nodes to handle. Clearly, adding more processing work to be done isn't the answer to that problem, and we probably can't afford enough processors to make even our current set of regulations actually get enforced.
    - krschultz 17y ago
      Lines of regulation is not a good measure. A lot of banking regulation is related to well, banking. Glass-Steagall is specifically related to investment banking which is a whole other ball game, and to call the repeal of that act insignificant because it isn't that "big" is patently absurd.
      - jerf 17y ago
        The repeal is not insignificant. My point was to counter the idea that banking had some sort of massive deregulation in the Bush era. One law repealed + massive growth in other regulations is hardly "deregulation".
        btilly 17y ago
        Ever heard of regulatory capture? That's where a regulated group attempts to get control over the regulators, so they can then regulate their own industry for their own benefit. It is universal that regulated organizations will attempt this, and usually they succeed. After a regulated industry undergoes regulatory capture you will see is a steady growth in the amount of regulation, and a simultaneous decrease in how much the regulation prevents that industry from doing what it wants. The regulations are added because they benefit the industry in some way, for instance by creating barriers to entry for potential competitors. That is what happened in finance. Glass-Steagall really kept companies from doing what they wanted to do, and got dropped. But we got new "regulations" like the optional alternative way of calculating net capital ratios introduced in 2004 that allowed the 5 major broker dealers to double their leverage. The result? More lines of "regulation" that reduced how much actual regulating there was. Oh right, and a few years later a bunch of failed broker dealers. See http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/ http://www.nysun.com/business/ex-sec-official-blames-agency-... for verification of that. Therefore a steadily increasing number of lines of regulation is not evidence that there wasn't major deregulation in the same time period.
- arijo 17y ago
  "extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems" - I see this recurring theme over and over again. Government vs free markets. The belief that some supernatural entity (the invisible hand on the free market) will make us all happy in the end is refuted by all human experience in the last millennia. As Karl Popper once said "Truth is not manifest". Humans will have to hack their environment continually in the face of hardship and arbitrarity - and in a democracy, the elected government is given the responsibility to execute that mission. Nature has not evolved to make humans happy, it's our task to make our world (economy) better - one hack at a time ...
- silverlake 17y ago
  There's a book out now called "This Time is Different: Eight Centuries of Financial Folly". Throughout history, in various types of governments and economies w/ varying degrees of regulation, there have always been financial disasters. There will always be financial disasters. So the issue is not more or less regulation. The issue is how to quickly recover from the next inevitable disaster. The best thing the government can do is quickly pay down the debt so that, in 10-15 yrs, it can borrow like mad during the next depression.
- sandrogerbini 17y ago
  >if our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter. If this summation was accurate, I would tend to agree with your conclusion that little government intervention is preferable. However, I respectfully disagree with the premise, pointing to the success of Glass-Steagall (read 'government intervention') in maintaining a healthy separation of depository/commercial financial intermediaries and their investment bank counterparts. It was, clearly, the deregulation and removal of said safeguard that allowed for the conditions of 'too big to fail' and gave meaningful, even disastrous implications for the average citizen. Finally, the author is either misinformed or intentionally ignoring the causal relationship between deregulation embodied in the Gramm-Leach-Bliley Act and the financial meltdown.
chasingsparks 17y ago
Cochrane was trying to set the context of the crisis. He even notes that the credit crises was an effective run on the banks. For more, see Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882
dsplittgerber 17y ago
"given that Chicago is broadly seen as discredited by the recent crash" By whom exactly? Mostly by those who tend to propagate further government influence on the markets. There are equally valid arguments which were made that government intervention in mortgage markets, fed policy etc. caused the crisis and the crisis could have been averted by having a truly free market. I just want to point out that you seem to be influenced by biases as well. To point out other people's biases but not to acknowledge your own seems unfair. That is why that whole 'lessons from the crash' thing is so difficult to grasp. Because everyone's analysis is ridden with pre-conceived notions and biases, it's hard to make out the actual truth.

by bonaldi 17y ago

Perceval 17y ago

>A Chicago school economist decides that the cause of the crash was regulation I don't think that's the point he was making with that quote. What he was getting at was that extensive regulation and oversight did not stop the problem from occurring in that sector. Ergo, extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems. If our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.

bonaldi 17y ago
Yes, I can see your reading of it now. But I think it would be disingenuous of him to make that claim, given the repeal of Glass-Steagall and the large reductions in regulation that allowed the problems in banking to be exacerbated (though this claim is itself questioned by other economists). A position that regulation either failed or was absent from banking adds a third choice, which isn't far from Krugman's: 3) better government intervention and fewer problems.
- jerf 17y ago
  Have you seen the charts of the amount of banking regulation per year, as measured in lines of regulation? I wish I could Google it up. The repeal of Glass-Steagall isn't even a blip in the graph, IIRC. It might be lines of above-average importance, but net-net the Bush administration continued piling on the regulations at pretty much the expected rate; I doubt a Democrat would or could have done much more. The other major problem is that it wasn't regulation that failed, it was regulators. Many regulations that already existed weren't enforced. Looking at the rate of regulation increase it isn't hard to see why. How do you propose to solve this problem with more regulations? There's a real engineering problem here or even a computer science-style information theory problem with information flows totally exceeding the ability of the processing nodes to handle. Clearly, adding more processing work to be done isn't the answer to that problem, and we probably can't afford enough processors to make even our current set of regulations actually get enforced.
  - krschultz 17y ago
    Lines of regulation is not a good measure. A lot of banking regulation is related to well, banking. Glass-Steagall is specifically related to investment banking which is a whole other ball game, and to call the repeal of that act insignificant because it isn't that "big" is patently absurd.
    - jerf 17y ago
      The repeal is not insignificant. My point was to counter the idea that banking had some sort of massive deregulation in the Bush era. One law repealed + massive growth in other regulations is hardly "deregulation".
      - btilly 17y ago
        Ever heard of regulatory capture? That's where a regulated group attempts to get control over the regulators, so they can then regulate their own industry for their own benefit. It is universal that regulated organizations will attempt this, and usually they succeed. After a regulated industry undergoes regulatory capture you will see is a steady growth in the amount of regulation, and a simultaneous decrease in how much the regulation prevents that industry from doing what it wants. The regulations are added because they benefit the industry in some way, for instance by creating barriers to entry for potential competitors. That is what happened in finance. Glass-Steagall really kept companies from doing what they wanted to do, and got dropped. But we got new "regulations" like the optional alternative way of calculating net capital ratios introduced in 2004 that allowed the 5 major broker dealers to double their leverage. The result? More lines of "regulation" that reduced how much actual regulating there was. Oh right, and a few years later a bunch of failed broker dealers. See http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/ http://www.nysun.com/business/ex-sec-official-blames-agency-... for verification of that. Therefore a steadily increasing number of lines of regulation is not evidence that there wasn't major deregulation in the same time period.
arijo 17y ago
"extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems" - I see this recurring theme over and over again. Government vs free markets. The belief that some supernatural entity (the invisible hand on the free market) will make us all happy in the end is refuted by all human experience in the last millennia. As Karl Popper once said "Truth is not manifest". Humans will have to hack their environment continually in the face of hardship and arbitrarity - and in a democracy, the elected government is given the responsibility to execute that mission. Nature has not evolved to make humans happy, it's our task to make our world (economy) better - one hack at a time ...
silverlake 17y ago
There's a book out now called "This Time is Different: Eight Centuries of Financial Folly". Throughout history, in various types of governments and economies w/ varying degrees of regulation, there have always been financial disasters. There will always be financial disasters. So the issue is not more or less regulation. The issue is how to quickly recover from the next inevitable disaster. The best thing the government can do is quickly pay down the debt so that, in 10-15 yrs, it can borrow like mad during the next depression.
sandrogerbini 17y ago
>if our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter. If this summation was accurate, I would tend to agree with your conclusion that little government intervention is preferable. However, I respectfully disagree with the premise, pointing to the success of Glass-Steagall (read 'government intervention') in maintaining a healthy separation of depository/commercial financial intermediaries and their investment bank counterparts. It was, clearly, the deregulation and removal of said safeguard that allowed for the conditions of 'too big to fail' and gave meaningful, even disastrous implications for the average citizen. Finally, the author is either misinformed or intentionally ignoring the causal relationship between deregulation embodied in the Gramm-Leach-Bliley Act and the financial meltdown.

chasingsparks 17y ago

Cochrane was trying to set the context of the crisis. He even notes that the credit crises was an effective run on the banks. For more, see Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882

dsplittgerber 17y ago

"given that Chicago is broadly seen as discredited by the recent crash" By whom exactly? Mostly by those who tend to propagate further government influence on the markets. There are equally valid arguments which were made that government intervention in mortgage markets, fed policy etc. caused the crisis and the crisis could have been averted by having a truly free market. I just want to point out that you seem to be influenced by biases as well. To point out other people's biases but not to acknowledge your own seems unfair. That is why that whole 'lessons from the crash' thing is so difficult to grasp. Because everyone's analysis is ridden with pre-conceived notions and biases, it's hard to make out the actual truth.