[ExI] AIG Bail out
Fred C. Moulton
moulton at moulton.com
Thu Sep 18 17:15:15 UTC 2008
On Thu, 2008-09-18 at 14:34 +0000, BillK wrote:
> On Thu, Sep 18, 2008 at 2:06 PM, Max More wrote:
> > It had nothing to do with the fed holding interests rates down too low for
> > years, right? Of course not. Nor did it have anything to do with the moral
> > hazard created by government financial guarantees. Anti-marketeers always
> > miss the real causes.
> There are many contributory factors and side-issues.
> But the *main* cause was lack of regulation.
But is 'lack of regulation' really the case? As has already been
pointed out financial markets are already regulated in the USA however
that regulation may not be appropriate and may create incentives for
investments to flow in ways where are problematic. Yet some of the
legislation about financial markets has been to create incentives for
certain kinds of investments particularly home mortgages and as we have
seen Fannie Mae has been problematic.
I have read the article by Tyler Cowen in the NY Times:
in which he discusses this issue of regulation and has this quote:
"The privatization of Fannie Mae dates back to the Johnson
administration, which wanted to get the agency’s debt off its books. But
now, of course, the government is on the hook for the agency’s debt. As
late as this spring, Congressional Democrats were pushing for weaker
capital requirements for the mortgage agencies. The regulatory reality
was that few politicians were willing to exchange short-term economic
gains — namely, higher rates of homeownership — for protection against
longer-term financial risks."
Cowen goes on to point out two ways to view this history. "First, with
the benefit of hindsight, one could argue that we needed only a stronger
political will to regulate every corner of finance and avert a crisis."
And the second is "Under the second view, which I prefer, regulators
will never be in a position to accurately evaluate or second-guess many
of the most important market transactions. In finance, trillions of
dollars change hands, market players are very sophisticated, and much of
the activity takes place outside the United States — or easily could."
As I reflect on Cowen's comments it seems to me that we might be in a
situation where regulation in the sense that many people are advocating
is no longer possible. The complexity, speed of execution and
jurisdictional questions are just some of the issues which need to be
Perhaps it is time for a new way of thinking about these issues.
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