Sunday, January 11, 2009

Deregulation Acquitted Again

Katherine Mangu-Ward takes on the meme that banking deregulation caused the meltdown in Reason magazine:
The Glass-Steagall Act of 1933 prohibited investment banks from acting as commercial banks, and vice versa. Signed by Bill Clinton (who continues to defend the legislation), the Gramm-Leach-Bliley Act of 1999 repealed those aspects of the law. Many on the left blame at least part of our current woes on that move. With the repeal, Barack Obama said in a March economic address, "we have deregulated the financial services sector, and we face another crisis."

In fact, multiple exemptions to Glass-Steagall had been granted for years before Gramm-Leach-Bliley was signed into law. Most European financial markets, not normally known as more "deregulated" than the U.S., never separated commercial and investment banks in the first place. And there is no correspondence between institutions that benefited from the repeal and those that recently collapsed. Institutions that didn’t take advantage of the Glass-Steagall repeal, such as Lehman Brothers and Bear Stearns, were the ones that failed most spectacularly, in part because they lacked the stability provided by commercial banking deposits.

If anything, Gramm-Leach-Bliley may have softened the blow. The George Mason economist Tyler Cowen argues that Gramm-Leach-Bliley made way for more diversity in the financial sector, and “so far in the crisis times the diversification has done considerably more good than harm.” Under the Glass-Steagall rules, Bank of America and J.P. Morgan Chase would not have been able to acquire Merrill Lynch and Bear Stearns. Nor would Goldman Sachs and Citibank have their current unified form, which may have helped them survive.

There is a significant body of academic work supporting this idea. The Rutgers economist Eugene Nelson White, for example, has found that national banks with security affiliates—the sort of institutions Glass-Steagall was designed to prevent—were much less likely to fail than banks without affiliates.
Agreed. See also Steve Chapman in Reason Online:
If there is anything we have learned from the crisis in the financial sector, it's the urgent need for more regulation. Had federal regulators been more vigilant or wielded greater powers, all this suffering and heartache might have been averted. That's the story we've been told, and it must bring a rare smile to the face of Bernard Madoff. . .

So if regulators had been paying attention, they would have detected what was going on, right? . . . In fact, as The Wall Street Journal reported the other day, the Securities and Exchange Commission had been suspicious of his methods for a long time. It had even heard in 2005 from a competing investment executive who drafted a 21-page report arguing that Madoff was running a Ponzi scheme.

The government had actually investigated him—not once or twice, but "at least eight times in 16 years," according to the Journal. Yet it "never came close to uncovering" the operation, which may have begun as early as the 1970s.

So what makes anyone think that future bureaucrats, no matter how vast their authority, will be able to do better? Advocates of stricter regulation often talk as though the choice for protecting investors is between imperfect market mechanisms and foolproof government regulations. In fact, governments, like every other institution, are staffed by fallible individuals who can be fooled as easily as anyone else.
(via Instapundit)

13 comments:

Assistant Village Idiot said...

People trying to win elections have strong incentives to blame what constituents blame, regardless of the facts. They want credit for fixing things and no blame for breaking them, but getting the answers right is only one strategy for accomplishing that.

bobn said...

So what makes anyone think that future bureaucrats, no matter how vast their authority, will be able to do better?

Ah, uyes, the wonderful circular logic of de-regulationistas.

You've got a president who doesn't believe in regulation, who appoints the biggest boobs in the world to be "regulators" Chrisotpher Cox and his pre-decessors who were more interesting in dismantling the SEC than running it - starves the agencies so they are hiring folks fresh out of school with no inudstry experience. Then when they "fail" to find obvious fraud - Markopolos detailed 29 red flags in 2005 - then you call it a failure of regulation.

This is world class dishonesty of the greatest magnitude. The stench of moral decay in beyond belief.

bobn said...

And lets not forget SEC's 2004 raising of the leverage limits of the big 5 former investment banks from 12:1 to 40:1 - I guess that had nothing to do with our current mess? (Those would be the 5 Ibanks that are either bankrupt or became bank holding companies so they could get at the Fed and TARP lending.)

Or the unregulated status of CDS - made permanent in legislation written by that worhtless fuck Phil Gramm and signed by Clinton - deregulationistas both - I suppose that had nothing to do with this?

Or federal pre-emption of state regulators trying to stop some of the sub-prime lending - that had nothing to do with this?


Oh and while we're talking about GLB, that bill was written to legitimize Citigroup's creation - and we are far, far away from hearing the end of their sorry story.

You deregulationists are so completely full of shit it is unbelievable.

OBloodyHell said...

> In fact, governments, like every other institution, are staffed by fallible individuals who can be fooled as easily as anyone else.

What, you mean like Barney Franks, et al, who said they wanted to "Roll the dice a bit more" with the FMs, when OFHEO warned that the Franks' ex-lover Raines and Clinton crony Gorelick were cooking the books in order to ensure their bonuses?


When the government gets involved, it isn't enough to have incontrovertible proof that chicanery is going on.

Proof?

Ken Lay would be in jail.

Where are Raines and Gorelick? Oh, right. Being considered for high-level jobs at the Treasury department...

If you're in private industry, the government goes "Off with his balls!!"

If you're not, the government goes, "Hey, Mistah Fox! Kin you watch the henhouse while I go git me some grub?"

S:-/

OBloodyHell said...

> You deregulationists are so completely full of shit it is unbelievable.

bob, your grasp of cause and effect is pathetic. You connect vaguely related associations (this happened, then later on, this happened!! See!! See!! Rivers cause beaver dams!!) ... and thus you think that "proves" *a* causes *b*.

Correlation is not causation.

P.S. Your liberal undies are showing.

bobn said...

You connect vaguely related associations (this happened, then later on, this happened!! See!! See!! Rivers cause beaver dams!!)

You just keep thinking that, OBH. Keep thinking that's an argument.

There is a difference between 12:1 leverage and 40:1 leverage. There is a difference between regulation and "self-regulation". If you choose not to see it, that's your fault and your willful ignorance.

As far as Liberal vs. Conservative, I think that is it actually Conservative to be highly suspicious of excessive concentration of power - I just don't stop thinking that way just because the concentrating entity involved is not government. You yourself have advocated against "too big to fail". Well, one way you deal with concentration of power is checks and balances, and regulation of business by the government is properly one of these. But I don't give a shit if you choose to call me liberal for this - I just couldn't care less.

As always, Thomas Jefferson is relevant:

"I hope we shall take warning from the example [of England] and crush in it's [sic] birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws our country. " - Thomas Jefferson, 1812.

Carl said...

bobn:

Preemption has nothing to do with the substantive policy, whatever it may be. Simply put, states can not regulate the practices of federally chartered banks and thrifts. So it had nothing to do with deregulation.

I think AVI's right.

OBloodyHell said...

> There is a difference between 12:1 leverage and 40:1 leverage. There is a difference between regulation and "self-regulation". If you choose not to see it, that's your fault and your willful ignorance.

The only major flaw is that the financial entities were allowed to meld until a major crisis would occur if the proper course were allowed to happen -- failure, divestiture, and reallocation.

If you want to argue that they need to be size-limited, fine, I won't dispute that.

Make it a requirement that any entity which accepts bailout is saying that it's too big to be allowed to fail
a) The individuals in charge have to all resign, en masse. Take off the top three tiers of management, all of whom are forbidden to take jobs at that company or any other bailout accepting company for not less than 10 years. Let 'em get real jobs.
b) Any entity which accepts bailout funds must be broken up, assets sold off or sections split off with no related association of management (i.e., independent business units), until all components are not more than 25% of the equivalent size financially that they were preceding the bailout. (or pick another number if you like -- but much, much smaller in assets)

Like any organization, there's a process involved when they screw up. The organization is split up, sectioned off, and sold out from under them. It's worked for decades, if not centuries.

And there's no reason to f*** with it. It was f***ing with it that got it into this mess in the first place.

The GSEs and the CRA were at the heart of it, despite your endless exclamations that they weren't just because they had mostly evacuated the scene of the crime by the time you want to look at the evidence, which is long after the whole mess got screwed up.

The problems started in the 1990s, bob, not in 2005. And no amount of obfuscation on your part can hide that to anyone who grasps both human nature and the nature of markets.

> I think that is it actually Conservative to be highly suspicious of excessive concentration of power

No, bob, that's LIBERTARIAN. The two aren't the same, not by a longshot. And "more and more regulation" is neither conservative nor libertarian, it's liberal -- it's a presumption that somehow there needs to be more regulation when it was far more a complete failure of the existing and already excessive regulation at the heart of it.

OFHEO, the appropriate regulating body, warned EVERYONE of hinky bookkeeping going on at the GSEs starting in 2003 (the warning, the hinky bookkeeping had been going on for a lot longer). When Congress finally started to look at it, they attacked not the GSEs but OFHEO's bookeepers, with Barney Frank, who clearly should have recused himself from the situation, given his personal history with the guy in charge at the GSEs, exhorting that the GSEs were, to paraphrase him, "a fine example of the way government can handle money" -- and claiming "I want to roll the dice a bit longer with Fannie Mae". Within a year the GSEs were in trouble, and as they slid down the crap chute, they brought all the others with them, since the others had all based a lot of their investment portfolios using ideas derived from the GSEs way of "doing business", a seriously flawed model whose flaws were hidden by Raines and Gorelick and the senate committee tasked with regulating the GSEs.

> Well, one way you deal with concentration of power is checks and balances, and regulation of business by the government is properly one of these. But I don't give a shit if you choose to call me liberal for this - I just couldn't care less.

LOL. bob, it's pretty much the DEFINITION of liberal these days. "Got a problem? Hey, the government is part of the solution".

Proper design of checks and balances does not involve making another entity whose screwups exacerbate the problem.

"The government" as a check and balance suffers three issues:

1) It puts more power in the hands of government. What part of "big government" did you imagine wasn't an evil in and of itself? Quis Custodiet Ipsos Custodes? (Hint: It ain't Barney Frank)

2) Adding complexity to a complex system does not increase its reliability for the most part. Adding complexity which has no responsibility (and all governments, by being immune to lawsuits, are inherently without responsbility. All they have is authority) is a guaranteed way to f*** anything up.

3) Government entities involve human beings. Human beings are averse to paying for their mistakes. They just are. And lacking responsibilty, as in part 2, means that, at best, a bureaucrat is involved in taking responsibility. FEMA "screws up" on Katrina, Michael Brown's head rolls. So, when there's a screwup, one of two things occur --
a) They find a low-level scapegoat they can blame it on -- this is the Columbia technique. Blow up a billion dollar spacecraft, blame it on a few poor schnooks making 80 grand a year. "It's damned sure not the fault of the guys at the top!!"
b) Hide, Obfuscate, Delay, Filibuster, Deny. Start looking for another job. With any luck, by the time anyone is aware that things are totally FUBARed, you'll be somewhere else with complete deniability. This would be the Fannie Mae technique. Hear anyone in the media calling for Frank Raines' or Jamey Gorelick's heads? Nah. They got out of the game before the music stopped playing any anyone noticed there wasn't a single chair in the room.

In short, Government ain't the solution, it's part of the problem. Despite all evidence to make it clear it's not so, people actually think that, by some miracle, a government regulatory body is going to be the solution to a problem.

YOU'RE SO CLUELESS, bob, you even whine about it even as you call for more of the same.

You kvetch and bitch about how the idiots in charge of the bailout are pretty much the same idiots in charge of the "deregulation" you're friggin' bitching about.

But somehow, you actually imagine that the same incompetent bozos in charge of the screwup THIS time are going to be different from the ones they set in place to watch over the regulations you want more of!!!

[snark on]
All they'll do is shuffle titles and chairs around, ya flinkin' pinhead!!
[snark off]

It'll still be the same jackasses doing the same good-for-nothing paper-shuffling CRAP they were doing before.

> You just keep thinking that, OBH. Keep thinking that's an argument.

I know it's not mindless naysaying, which damned sure is what you just did.

If that's how it works:

"NUH-uh!!! Nanny nanny boo boo!!!"

I win.

> As always, Thomas Jefferson is relevant:

Thomas Jefferson, for all his intellect and brilliance, was an anti-business agrarian, whose agrarian concept of America would have us still a farmer's paradise and the world many trillion dollars poorer, and probably one hell of a damned sight less free to boot.

There are places to take his advice, and places to ignore it. This is one of the latter. I would no more quote him on this than I would Einstein on geopolitics. It ain't his field of specialization.

So no, he ain't relevant.

bobn said...

Correlation is not causation.

See here - written especially for you and Carl. :)


The only major flaw is that the financial entities were allowed to meld until a major crisis would occur if the proper course were allowed to happen -- failure, divestiture, and reallocation.

If you want to argue that they need to be size-limited, fine, I won't dispute that.


Nice try. But given the herd mentality and complete lack of regulation, we'd just have the same unfathomably large problem, spread out over more entities, still all interconnected with CDS.

The GSEs and the CRA were at the heart of it,

Re CRA and GSEs, see here and here and here. Facts are facts.

The problems started in the 1990s, bob, not in 2005.

See here and here and STFU until you have some facts.

Thomas Jefferson, for all his intellect and brilliance, was an anti-business agrarian

Yes but he understood business. See here and tell me he's not accurately describing what has happened now, 200 years ago.

I win.

Check back with us when you're through with puberty.

Carl said...

I'll be brief, since much of this has been covered here before.

1) Except for blaming CRA, I agree with many of OBH's points, if not necessarily his expression.

2) I don't think finger-pointing political party failures is critical. Pinpointing causes are. The implicit government guarantee of GSEs, combined with their expansion into sub-prime, represents the most important failure of regulation relevant to the current crisis. That began in the 1990s under pressure from banks and the Clinton Administration. bobn's charts are unpersuasive--the snowball took a while to grow.

3) Banking deregulation isn't to blame, as a quote tomorrow will support. Indeed, to some extent, domestic deregulation was offset by new international agreements (especially Basel II), which were supposed to fine-tune margin requirements. Given how off-base bobn is about preemption--a Constitutional requirement having nothing to do with deregulation, see Watters v. Wachovia, No. 05-1342, Section III (U.S. Apr. 17, 2007)--I'm suspicious of his other points.

4) Yes, we allowed leverage to become too high. But bobn never addresses why that happened: because the financial models used by both bankers and regulators--particularly VaR--were wrong. How would additional regulation fix that? Remember, Wachovia was a well-run bank that cratered because it bought into the sub-prime market. (I do agree that additional disclosure rules--especially regarding off-book asset shifting--make sense.) This was, more than anything else, a failure of company management, which we don't regulate.

5) Governmental rules usually aren't necessary to ensure regulated entities, including Financial institutions, don't make idiotic decisions that turn the companies into bankrupts. OBH is right to call bobn's contrary view liberal, not libertarian. The Jefferson passage bobn quotes is not to the contrary, since (outside a couple cases of fraud) few laws were violated by the failed companies.

6) Not every failure can be blamed on someone or something. Sub-prime loans weren't illegal, and shouldn't be. Investment banks self-regulate because, until now, only stock and bond holders were at risk. Interest rates were kept low to encourage economic growth. I'm not sure what I would have done differently.

Carl said...

I neglected to link to John Cassidy's prescient analysis from the November 2002 New Yorker.

bobn said...

I don't think finger-pointing political party failures is critical.

Note that I now damn deregulationists in general. The Clinton Admin was full of these: Rubin, Summers come immediately to mind. But Buschco - especially the Bush SEC - were special in this regard.

bobn's charts are unpersuasive--the snowball took a while to grow.

Meaning you don't like what they clearly show. The charts speak for themselves and they clearly show the bubble period is not as you or OBH state.

Yes, we allowed leverage to become too high. But bobn never addresses why that happened: because the financial models used by both bankers and regulators--particularly VaR--were wrong.

Who said the regulators were looking at VaR? And why should they have? We know what reasonable leverage is - we've known it for decades, if not centuries. The radical change, based on some model (or not), was absurd on the face of it. And the bodies afforded this higer leverage are now destroyed - go ahead, tell me now that correlation is not cause.

Governmental rules usually aren't necessary to ensure regulated entities, including Financial institutions, don't make idiotic decisions that turn the companies into bankrupts

Like Wachovia? Like WaMu? Like the 5 investment banks who pushed hard for the increased leverage that destroyed them? Suuuuure!

Sub-prime loans weren't illegal, and shouldn't be.

Loans that can never be repaid should be illegal when made by systemically important bodies, or bodies having access to the Fed windows.

Investment banks self-regulate

And a damn fine job they did of it too!

The Jefferson passage bobn quotes is not to the contrary

Again you don't see what you don't want to see. When human beings conduct themselves as corporations do, we label those humans as sociopaths.

OBH is right to call bobn's contrary view liberal

Like I give a shit what you or OBH label my politics. "Ooohhh - they called me liberal - I'm so ashamed" - NOT!

bobn said...

Thomas Jefferson, for all his intellect and brilliance, was an anti-business agrarian, whose agrarian concept of America would have us still a farmer's paradise and the world many trillion dollars poorer, and probably one hell of a damned sight less free to boot.

Thomas Jefferson was the main proponent of the Bill of Rights. Tell me he left us less free.

We owe the Bill of Rights to the Anti-Federalists's insistence on it. I've been meaning to read the Anti-Federalist Papers.

I would no more quote him on this than I would Einstein on geopolitics. It ain't his field of specialization.

Actually, Einstein did pretty good on geopolitics.