Just Hire The Genius Regulators... Ooops!

The NY Times reviews two books on the early Obama years.  One covers the financial crash; I am sure the actual analysis is much more nuanced, but this head-bangingly over-simplified description of efficient market theory is refuted within the Times own story:

In fact, the main reason the financial crisis of 2008 occurred, the journalist Michael Hirsh argues in his provocative new book, “Capital Offense,” is that “the people in charge of our economy, otherwise intelligent and capable men like Greenspan, Rubin and Summers — and later Hank Paulson and Tim Geithner — permitted themselves to believe, in the face of a rising tide of contrary evidence, that markets are for the most part efficient and work well on their own.”

...

In these pages Mr. Hirsh looks at how the ideas of John Maynard Keynes — predicated upon the belief that markets do not automatically self-correct, and that government intervention is sometimes necessary — were embraced in Washington in the wake of the Great Depression. He chronicles how the opposing ideas of Milton Friedman — who believed that free markets functioned efficiently without bureaucratic interference — gained ascendancy with the election of Ronald Reagan and the abrupt collapse of the Soviet Union. And he charts how the deregulation movement accelerated during the administrations of Bill Clinton and George W. Bush, arguing that it created an “indomitable zeitgeist” that would set the stage for disaster.

Regarding the differences between advocates of government intervention and those who contend that free markets operate better on their own, Mr. Hirsh says that such arguments, boiled down, are “largely about the issue of human rationality versus irrationality. One side holds that markets are basically rational and efficient on their own — that they are an optimal way for societies to allocate resources — and governments only interfere. The other side holds that markets and the people who make them up often behave irrationally, inefficiently and unjustly, and therefore the best course is to keep government involved at all times.”

Right - we should keep government involved because unlike humans, our Martian overlords are not subject to emotion, folly, political manipulation, regulatory capture, or any of the other problems vexing human institutions (that's why we found so many WMDs in Saddam's Iraq and Afghanistan is going swimmingly).

Or, if we have to settle for mere humans as regulators, at least we can hire the best and brightest.  Oh, wait!  Back to the Times lead:

A now infamous 1999 Time magazine cover featured Alan Greenspan (then chairman of the Federal Reserve), Robert E. Rubin (then Treasury Secretary) and Lawrence H. Summers (then deputy Treasury secretary) as “The Committee to Save the World.” The three men, the magazine declared, had steered America through the perilous shoals of highly volatile world markets. The United States economy remained “astonishingly robust” and, by protecting American growth, the three had made “investors deliriously, perhaps delusionally, happy in the process.”

A decade later, in the wake of America’s 2008 fiscal meltdown, the thinking of Time’s “Three Marketeers” and their colleagues in Washington and on Wall Street would be cited as a major cause of that crisis. Mr. Greenspan has been chastised for keeping interest rates too low for too long, for failing to see the danger of subprime mortgages and falling house prices, and for neglecting to use the Fed’s regulatory clout to restrain the excesses in the market. Mr. Rubin has been taken to task for promoting the repeal of the Glass-Steagall Act, which was passed during the Great Depression and prohibited commercial banks from engaging in the investment business. And Mr. Summers has been criticized for failing to foresee the risks derivatives posed and for his reluctance to regulate these exotic financial instruments.

So let's see - we had the geniuses in charge and it all went south anyway?  So therefore the answer is to engage better geniuses?  Hmm.

A far more fruitful approach would be to examine flaws and distrotions in the market.  Pollution is famously modeled as a failure of property rights and a 'tragedy of the commons' - for the longest time, no one had or exerted ownership rights over air or rivers, so pollution was 'free" to individual pollutants.

Or, if the housing market is at issue, one might ask whether government-sponsored FNMA crushed the market for conventional mortgages by hoovering up every conforming mortgage in sight, thereby pushing lenders into riskier markets such as sub-prime.  Since FNMA was a very well-bankrolled market participant with incentives that went beyond mere profit-maximizing, their behavior could have easily distorted the market.

And of course the whole "too big to fail" investment strategy only made sense because there was a government entity prepared to prevent failure.

Comments

[Oh, I know, to the lefties it doesn't exist if they can't see it.]

Well, we have the 'Invisible Hand', why not the 'Invisible Mind', too?
==============================

[A little later I thought of 'Only government can hurt everyone.']

They just don't get it about command economies, do they? It's like they can't imagine wanting something government can't give them.

I remember a brief conversation with a liberal I respect because he's a climate skeptic. He said something like 'For those only government can help' and I came back with 'There is no one whom only government can help'.
=========================================

[Clarice]

In a time of absolutely idiotic political writersMichael Hirsh deserves an award for the worst. He has been 100 % wrong on everything I've ever heard him say or write.

I.D.I.O.T. (Doubt me? Check out his carp about why we went to war in Iraq.)

He as much admitted to me that he writes for market --the progs in blue hells-- and not for the truth.

[narciso]

Well seeing how Hirsch missed the fact that his new penpal, the Iranian diplomat Mohsen
Rezai, was their former spymaster, we can stipulate he knows nothing of economic policy, either, saves time

[anduril]

It's your lucky day, JOMers--you get to see the kind of things I write in private emails to friends. Follow the links for the full interviews I reference. Here's what I sent to a friend in April, 2009, re "geniuses," or at least re massive egos:

These two links contain incredible interviews, if you're interested in the economy crisis:

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=297

sample:
The IRA: But speaking of certainty, don't you believe that it is impossible to give our leaders a pass with respect to the mortgage bubble? How can we look at Alan Greenspan, Larry Summers or Bob Rubin and allow them to say that they were surprised by the magnitude of the bubble and the horrible consequences?

Dickinson: Well, partly because these massive egos believe that they had "fine tuned" things and would not take any of the consequences of a break. They thought that their record of qualification would distinguish them and keep them from being blamed. The reality is, in my view, than none of them had the courage to overturn a few apple carts early in the game and thereby forewarn the public before the 18-wheeler overturned. [comment: sounds like dickinson thinks they knew the shit was about to hit the fan]

and

Dickinson: But back to the systemic issue, democracy is after all an allowance made by the sheer complexity of things. No one is in charge because no one is genuinely informed enough to be in charge. There is absence of government by default. It is so interesting to look at the Iraq war. Even this self pleased crowd [in the Bush Administration] had to admit that they did not know their stuff about the Middle East…

The IRA: We did not notice any reluctance on the part of the Bush Administration to plunge into a trillion dollar war.

Dickinson: They were certain, but that is a very different thing from being informed. This is a morality play for them, not an unfolding of expertise. And the war in Iraq is meant also to be an example to China and Russia, even as the latter complains about the advance of the EU to their western borders. The Russians know that the real arm wrestle is and will be in Central Asia.

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=287

sample:

The IRA: Did you see the article by Larry Summers in the Financial Times? Offering us prescriptions to solve the crisis which he helped to create? The New York Times ran a great article on April 27, 2008 ("Where Was the Wise Man?") describing how Greenspan, Summers and Bob Rubin worked to stifle regulation of the OTC markets.

[narciso]

Greenspan did make some vague warnings, but he had to know the interest rate hikes would
pop the subprime bubble, that's what happened
the last time with tech, Rubin was like evil
Santa, sending all this repackaged to England,
and Greece,

[Melinda Romanoff]

TM-

Nitpicking here.

In the next to last paragraph, the opening sentence reads: "Or, if the housing market is at issue, one might ask whether government-sponsored FNMA crushed the market..."

A more accurate way to put it would be: "Or, if the housing market is at issue, one might ask whether government-sponsored FNMA crushed the PRIVATE market..."

Which makes a world of difference.

Thank you.

[anduril]

And here's a great, great quote from a book review re "towering geniuses," also sent in a private email way back when. I'll format this one:

Satyajit Das: Even More Crunch-Porn and Crash Lit

These last few paragraphs are classic:

It seems that the global financial crisis is the economist’s moment in the sun. They are busily “solving” the problem, sometime with pet theories or, more often, rehashing old ones. Unsurprisingly, there have been spats between economists with allegiances to different camps. Most notable fights include Paul Krugman versus Stephen Roach, Martin Wolf versus Niall Ferguson etc. If Friedman had been alive, then it would have been Milton versus all comers. If Keynes had been alive, then the jousts would have at least been witty and cultured. No modern economist can touch Keynes and John Kenneth Galbraith for pungent wit.

Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem: “One of my favourite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?” I responded something to the effect of “Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century” To which you replied, “But is he smart like us?” Economists have delusions of adequacy and a related assured self-confidence that they bring to any problem.

Rogoff went on to note that in one of Stiglitz’s books – “Globalisation and its Discontents“: “… I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem. When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals like Federal Reserve Chairman Greenspan or then-Treasury Secretary Rubin did not listen to your advice.” Rogoff concluded that Stiglitz was “… a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a “beautiful mind.” As a policymaker, however, you were just a bit less impressive.”

Writing in his preface to Benjamin Graham’s “Intelligent Investor”, Warren Buffet observed that: “…not only does a sky-high IQ not guarantee success but it could also pose a danger…I therefore urge the relevant regulatory bodies of the United Studies and Canada to incorporate an IQ test into their securities licensing exams. … nobody would be allowed to work in the financial markets in any capacity with a score of 115 or higher. Finance is too important to be left to smart people.” One could add economics should definitely never be left to economists.

[Charlie (Colorado)]

So let's see - we had the geniuses in charge and it all went south anyway? So therefore the answer is to engage better geniuses? Hmm.

Isn't that always the answer? We can't let things work themselves, we have to have someone in charge? Who? Why the geniuse.

Hasn't worked out in the past? Well, those geniuses weren't really geniuses. They weren't smart enough.

Who is smart enough?

(modest cough.)

In other words "you need to be ruled. By us."

[anduril]

Just because geniuses turned out to be not so smart doesn't mean we want to put really dumb people in charge, either.

[tea anyone]

Well surely you know ------ We are the geniuses we have been waiting for.....

[Melinda Romanoff]

All you need to know about Stiglitz is his latest "client", Greece.

Here he gets schooled.

[narciso]

Stiglitz, teaching Hirsh all he knows, 'talk about the blind leading the blind' Chavista
afficionado, and the "Three Trillion dollar (Dr. Evil pinky sworl) war" meme promoter.

[anduril]

All you need to know about Stiglitz...

This is a bit difficult to conceptualize, except as a sort of Catch-22, but, hey, sorry, Mel, it looks like according to JOMer rules I'm gonna have to shun you--for not shunning ME.

[The Twenty-First Censury.]

Must have been good stuff, Mel; copyright infringement has been alleged.
================================

[JohnW]

Can someone explain to me the rationale behind "the Glass-Steagall repeal lead to the financial crisis?" I hear that argument all the time from lefties, but I've never actually heard how it actually is supposed to have worked.

[Melinda Romanoff]

Kim-

Transcript (of sorts).

[Rob Crawford]

JohnW -- you realize lefties only repeat that because they were told to, right? They have no idea what the causal relationship is, either, they just know it can't be related to Barney Frank being one of the most corrupt people in history.

[I went straight for the fireworks in Pt. II. Oh, well.]

Thanks, Mel; I interpret differently according to whether it is video or transcript and generally I prefer transcript if I want to think about the arguments.
=======================

[narciso]

Stiglitz, and a diplomat turned novelist, Casajuanes,try to lecture Hendry, hilarity ensues.it's like a real life version of that Dawes parody routine down Under.

[Oops, might have just tilted the scales on the system of rewards. Sorry.]

By the way, anduril, thanks for the clarity yesterday about the Health Law. You don't get enough thanks for your contributions, but you get plenty of feedback otherwise, so I guess it all evens out in the end.
======================

[Rick Ballard]

"thereby pushing lenders into riskier markets such as sub-prime."

Quick, my violin. Lessee - Rubin was Secretary of Citi while Paulson was Secretary of Goldman-Sachs, then Orsag was Budget Director before becoming Under -Secretary of Citi. Meanwhile, pack at poor little JPM, elves were busy knitting up the first investment banker suicide vests because the nasty FNMA whores had stolen all the easy money strolls with the muscle provided by DC pimps. What's a hooker without looks or muscle to do? Perhaps that's why Dimon is angling for the Chairman position at Treasury

I've heard that inbreeding produces idiots. Perhaps Dueling Banjos should be played prior to any announcements made by members of the very well credentialed morons comprising the Wall Street/DC financial clique.

[anduril]

JohnW, you might want to start with the Wikipedia article discussion of the pros and cons re repeal and reenactment:

http://en.wikipedia.org/wiki/Glass–Steagall_Act

My take is that it wasn't repeal of Glass-Steagall per se that led to the problems but the fact that repeal led to an essentially unregulated market in derivatives in the context of a wild, government fueled housing bubble. I'm totally open to correction on this, and will continue standing if corrected, but...

Louise Story has an interesting article in the NYT:

http://www.nytimes.com/2010/12/12/business/12advantage.html?_r=1&ref=louise_story&pagewanted=print

A Secretive Banking Elite Rules Trading in Derivatives By LOUISE STORY On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

...

In, Out and Around Henhouse

The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States.

That puts them in a pivotal position to determine how derivatives are traded.

Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses.

Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt.

Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits.

The banks already have a head start. Even a newly proposed rule to limit the banks’ influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules — on topics like transparency and possible electronic trading — will drastically change derivatives trading, or leave the bankers with great control.

One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.

“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”

Story has written more on related topics:

http://topics.nytimes.com/top/reference/timestopics/people/s/louise_story/index.html?inline=nyt-per

[Rick Ballard]

Obama My Tap Outsider to Replace Summers

What a daring move - he went all the way to Yale to find someone with a different view...

[Jeff]

the crisis was casued by regulators distoring the free market not the other way around ...

redlining regs and FNMA and Freddie Mack created a perfect storm of no moral hazard for lenders who were being forced to make the loans anyway ...

[narciso]

Yes we need more of this, is he related to Krugman?

n January 2009, Levin said in a Bloomberg Radio interview that Obama’s stimulus package “may not be enough” to revive the economy.

[Ignatz]

--“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”--

The banks haven't regulated themselves for many decades and we now see that the government will ensure the taxpayer shields them from the merciless regulation of the market itself, so of course they have zero interest or expertise in regulating themselves; they'd be fools if they did.

[anduril]

Jeff, I don't disagree from the standpoint of the Housing Bubble. However, I'm maintaining that repeal of Glass Steagall fed into that. The storm wouldn't have been anywhere near as perfect without the unregulated market in derivatives. Someone with more knowledge may wish to refine my statement, but I believe that I'm at least pointing to a significant factor.

Re no moral hazard, the idea of too big to fail was already prevalent BEFORE this crisis hit--as you point out--but this idea was also far broader in scope than the Housing Bubble. Someone else may wish to go into how we got to the point of too big to fail, but I would maintain that the essentially unregulated market in derivatives fed into that in a big way.

Specific correction is welcome.

[Not Osama, my friends.]

Is someone we all know and love being held captive and forced to sign peace treaties?
===============================

[Porchlight]

OT (sort of):

Reposting the Stanley Kurtz speech Ann linked in an earlier thread. Well, well worth your time. Thanks, Ann.

[Ignatz]

And derivatives are merely one symptom of a disease known as easy money. Absent the credit bubble created by the Fed, Fannie and Freddie and redlining and derivatives would have still been market distorting problems, but they would not have been a financial time bomb because none of those things were capable of creating a bubble in asset values which was the root cause of the meltdown. Had John Taylor been head of the Fed and Bill Isaac Treasury Secretary we'd be wondering whatever happened to that creepy little junior senator from Illinois who lost in 2008.
But of course then we'd be afflicted with Johnny Mac as Pres. Hmmm.

[The irony is evil.]

In my view, there is plenty of blame to spread around for this financial crisis. But it keeps coming back to the simple and mistaken moral judgment the Democrats always make about race and class, and their simple minded and sinful love of money.
============================

[glasater]

The Hendry vs Stiglitz videos are just wiped from the internet.

In my searchings I found this link I had bookmarked that is rather interesting:

Check Out Janet Tavakoli's Presentation On Why Housing Finance Was Always "Fraud As A Business Model"

[narciso]

It's all a scam, thanks Scott, btw, in the LUN

[Melinda Romanoff]

glasater-

BBC owned the rights, so not surprising.

There exists no single simple answer to the collapse, let alone using a Wiki to define the repeal of an act that no one seems to actually recall what was being restricted by it.

And I don't have time for an essay of Iliad proportions.

As a rule, never, ever rely on Wikis for definitions of complex financial activity, most are "edited". As soon as they are recognized in a court of law, I'll start paying attention.

[glasater]

Mel--I understand. But the point of that presentation is a stab at trying for some backward looking perspective and its one woman's attempt.

Tavakoli is from your neck of the woods and found her via this article.

[narciso]

The problem lies with the source material, in the footnotes, which misrepresents the event at the end.

[anduril]

anduril: JohnW, you might want to start with the Wikipedia article discussion of the pros and cons re repeal and reenactment

Mel: There exists no single simple answer to the collapse, let alone using a Wiki to define the repeal of an act that no one seems to actually recall what was being restricted by it.

And I don't have time for an essay of Iliad proportions.

As a rule, never, ever rely on Wikis for definitions of complex financial activity...

Thanks, pal.

[anduril]

Check Out Janet Tavakoli's Presentation On Why Housing Finance Was Always "Fraud As A Business Model"

CDOs and CDOs squared were just "fraud to cover-up fraud," according to Janet Tavakoli of Tavakoli Structured Finance.
In this presentation made today to the Federal Housing Finance Agency Supervision Summit, Tavakoli explains individuals at firms making mortgage backed securities knew the loans they were securitizing were fraudulent.

Tavakoli walks through all the parties involved, and claims the banks held the U.S. government hostage as the market started to collapse, resulting in the bailout scenario. She places the blame for this scenario on the shoulders of banks that made fraudulent loans.

It's a concise walk through of the market collapse some blame for the Great Recession.

http://www.businessinsider.com/janet-tavakoli-fraud-as-a-business-model-2010-12#

Posted by: anduril | December 08, 2010 at 02:39 PM

[anduril]

Reposting the Stanley Kurtz speech Ann linked in an earlier thread. Well, well worth your time. Thanks, Ann.

Posted by: Porchlight | December 14, 2010 at 12:27 PM

Anti-semitic shit like that could get you shunned around here. Kurtz is obviously a self-hating Jew of the worst sort.

[Neo]

According to scientists' models of Earth's orbit and orientation toward the Sun indicate that our world should be just beginning to enter a new period of cooling -- perhaps the next ice age.

So exactly who is in charge over at NASA ?

... or is this just a "bait-n-switch" on the subject of models ?

[Jim Rhoads a/k/a vnjagvet]

This is a fascinating thread. I'm generally suspicious of conspiracy theories, but Kurtz's research as he recounts it in Porch's link, together with the information that Rick and Anduril recount above tell a great deal of the story as to why we are where we are now. There is an overt and covert conspiracy that is directed to the kind of "change"The facts seem to be pretty well documented, indisputable and even acknowledged by the conspirators. But, of course, these facts are minimized or ridiculed by the MSM.

Too bad Ronald Reagan isn't still around when we need him. He could distill all the facts in a way that all but the obtuse and hopelessly prog would understand and take action to remedy.

ISTM, In the next two years, many of our efforts should be directed towards finding credible spokespeople and other vehicles to get this information out to the general public.

[narciso]

Just as I thought, the argument against repeal
is offered by Elizabeth Warren, some one who clearly has a conflict of interest as we have
seen in the LUN.

[jimmyk]

Just because geniuses turned out to be not so smart doesn't mean we want to put really dumb people in charge, either.

The problem with geniuses is not so much their lack of smarts is their lack of humility. There's no problem they don't think they have the answer to, no matter how many times the markets prove more complex and unpredictable than they realize.

[Chubby]

((There exists no single simple answer to the collapse, let alone using a Wiki to define the repeal of an act that no one seems to actually recall what was being restricted by it.))

wasn't it disallowing banks to play the markets with consumer deposits?

[anduril]

At the risk of being labeled an anti-semite, here is a very fine book review by Kurtz which, IMO, more correctly identifies what we're up against, in several parts of the world. There's a lot more to be said, but Kurtz gets the discussion off to a damn good start:

Tribes of Terror

Steven Pressfield has an article with related ideas that's worth a read:

Tribalism is the real enemy in Iraq

Both these articles are part of why I seriously question the wisdom (genius status?) of those who got us where we are, and why I insist that the only sensible precautionary solution to defending the US as we know it (what Sarah whatshername's would call a "common sense conservative solution") is serious reform of our immigration laws to exclude people who would bring culture's to our country that our fundamentally antagonistic to our way of life.

[jimmyk]

they have zero interest or expertise in regulating themselves; they'd be fools if they did.

Precisely. This has followed the standard pattern: The government promises to improve on self-regulation, so self-regulation disappears. Then the government mucks it up worse than the self-regulators ever did.

[anduril]

True, jimmyk, but that's another way of saying that lack of humility is not so smart. :-) My father (as some people around here will be glad to tell you) was a "shrink," and one thing he told me that I've always taken to heart is that real intelligence is to a significant degree a function of personality. Intellectual horsepower is part of the mix, but at a fairly basic level character issues begin to play a significant part in one's ability to gain consistent insight into reality. This is partly why game solving, etc., doesn't always transfer into real life problem solving.

[Neo]

Those who think Mr. Bloomberg would want to build a similar kind of organization, be it No Labels or something else, are assuming that the growing power and disaffection of independent voters who identify with neither Democrats nor Republicans make a third party more viable than it has ever been. In fact, though, the rise of the independents represents a movement in exactly the opposite direction — away from party organizations altogether.

The Times thinks a "third party" based on the power of "NO" just isn't in the cards.

[anduril]

Chubby, here are the pro/con arguments from the
Wiki article I referred to above. Of course, you should ignore this entirely, even as a way of working your way into thinking about these issues:

The argument for preserving Glass–Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act.

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.

2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.

4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[11]

[narciso]

So, Lubke, doesn't seem to have the expertise
that would grant him the judgement he seems to entertain, in the LUN

[narciso]

Sorry wrong LUN again,

[anduril]

1. The government promises to improve on self-regulation, so self-regulation disappears.

This shouldn't necessarily follow. If banks are still subject to the consequences of bad behavior/bad management they will still have an interest in self regulation.

Then the government mucks it up worse than the self-regulators ever did.

It would be interesting to compare financial crises before Glass-Steagall, under the Glass-Steagall regime and what has followed repeal. I think there is room for discussion as to which form of regulation is better or worse.

From a personal perspective, having spent several years investigating criminal bank fraud, my views on self regulation may be somewhat colored by my experiences. I will frankly admit to having a very low opinion of the intelligence and integrity of bankers as a class.

[anduril]

Good God:

Both these articles are part of why I seriously question the wisdom (genius status?) of those who got us where we are, and why I insist that the only sensible precautionary solution to defending the US as we know it (what Sarah whatshername's would call a "common sense conservative solution") is serious reform of our immigration laws to exclude people who would bring culture's to our country that our are fundamentally antagonistic to our way of life.

[Porchlight]

Jim Rhoads,

I found it interesting when Kurtz described how he really didn't want to make the "socialist" argument because he felt it wasn't respectable, and then discovered that he would eventually have to make it, because his research led him to the inescapable conclusion that Obama was/is in fact, socialist.

[narciso]

Can they be this tineared, yes they can, in the LUN

[Neo]

Somebody regulating incorrectly ? Hey, just report them ...

Citizen Concepts announces the launch of PatriotApp, the world's first iPhone application that empowers citizens to assist government agencies in creating safer, cleaner, and more efficient communities via social networking and mobile technology. This app was founded on the belief that citizens can provide the most sophisticated and broad network of eyes and ears necessary to prevent terrorism, crime, environmental negligence, or other malicious behavior.

This is destined to be renamed "SnitchApp"

[jimmyk]

If banks are still subject to the consequences of bad behavior/bad management they will still have an interest in self regulation.

True, in theory, but that is a charmingly naive view of how regulation works in practice. "Regulatory capture" follows regulation as sure as night follows day.

It would be interesting to compare financial crises before Glass-Steagall, under the Glass-Steagall regime and what has followed repeal.

I wouldn't focus so much on Glass-Steagall, which in my view had little to do with recent crisis. My statement was much broader. For example, prior to the Fed, banks had a clearinghouse system to provide liquidity to banks during panics. It was far from perfect, so Congress gave us the Fed in 1913 to act as "lender of last resort." Then a mere 16 years later we got the worst panic in history as the Fed completely dropped the ball.

[Charlie (Colorado)]

So exactly who is in charge over at NASA?

Well, to some extent no one, and that's good.

(BTW, the new Chief Scientist at NASA is a local geographer. I'm not sure how geography is a science but I'm trying to get an interview with him.)

But I think the way to interpret that is that another side effect of Climategate is that the AGW fanatics at GISS no longer have unquestioned dominion over climate science at NASA.

[Charlie (Colorado)]

BTW, I'm noticing Anduril has just made several significant original contributions. This is to be applauded.

[boris]

pass

[Mark Folkestad]

Anduril, you caught yourself on the homophone error, our/are, but just before that clinker was the improper use of the apostrophe. Neither one would have earned more than a yawn from me, if it had not been for the fact that you have jumped on others for those things in the past. Ease up, drop the ego trip and perhaps we will be alert for the valid nuggets you sometimes share.

[Pagar]

"Why Housing Finance Was Always "Fraud As A Business Model""

You're never going to fix housing finance (IMO)
until you get rid of Mers-Smoking Gun ==== Mother of all Fraud.

[Danube of Thought]

Forget it, MarkF--the man's an obnoxious fool, and there's no cure for that.

[daddy]

Sorry

John Jay
Thomas Jefferson
John Marshall
James Madison
James Monroe
John Quincy Adams
Henry Clay
Martin Van Buren
Daniel Webster
James Buchanan
William H Seward
George Marshall
George Schultz
etc,

">http://www.hindustantimes.com/Clinton-best-ever-State-Secy-Obama/Article1-638119.aspx"> but "There is a growing bipartisan consensus that Hillary Clinton is the best ever Secretary of State, US President Barack Obama has said."

[narciso]

You forgot Blaine, daddy. I think the region still still hasn't recovered from his tenure,
Marti and Dario, was were particularly acid
about him. Involved in the Credit Mobilier,
fiercely anti Catholic, the Blaine laws

[anduril]

just before that clinker was the improper use of the apostrophe.

I caught both:

Good God:

Both these articles are part of why I seriously question the wisdom (genius status?) of those who got us where we are, and why I insist that the only sensible precautionary solution to defending the US as we know it (what Sarah whatshername's would call a "common sense conservative solution") is serious reform of our immigration laws to exclude people who would bring culture's to our country that our are fundamentally antagonistic to our way of life.

Posted by: anduril | December 14, 2010 at 01:51 PM

[Mark Folkestad]

Anduril, "culture's". Possessive instead of plural.

[Ignatz]

--Anduril, "culture's". Possessive instead of plural.--

Perhaps no one reminded him to breathe this morning.

[Mark Folkestad]

Ignatz, gods don't need to breathe, and he fancies himself one.

[daddy]

Well narciso,

Since TM's post here is about geniuses I just wanted everyone to know that Obama (who Presidential Historian Michael Beschloss says is "probably the smartest guy ever to become President," and "whose IQ is off the charts," has also appointed "the best Secretary of State ever."

This comforts me. Now that I know we have the pinnacle of genius and accomplishment running the country, I feel comfortable in going out to walk the dog since surely the country is in the best of all possible hands.

BTW, did you see that Holder may nail Chris Christie for ordering an extra slice of ">http://nation.foxnews.com/gov-chris-christie/2010/12/14/obsessed-democrats-digging-through-christies-meal-receipts"> Gorgonzola Cheese?

Chow--errr Ciao.

[Danube of Thought]

Why quibble with the punctuation when the proposal being advanced is palpably insane?

[Clarice]

Well, if you want to be rational, DoT.......

[Rick Ballard]

Jim Rhoads,

When one considers the ease with which the oligarchs of the Ivy League, Wall Street, DC, Axis of Idiots could slide in behind Obama on his march to fascism, the necessity of the populist Tea Party becomes rather obvious.

As to regulators and regulation, perhaps breaking the Too Big Too Flush zombies into pieces that would flow easily through the bankruptcy waste water system is the correct place to start. Beyond that, seeking regulators from the pension and mutual fund lamb corps rather than from the ravenous wolves of the Axis of Idiots might have some merit.

Ann & Porchlight - thanks for promoting the Kurtz speech. I rarely watch videos, preferring the transcripts, but that one was well worth the half hour. Kurtz has the Kendonesian commie pegged.

[Army of Davids]

Since 2000 GSEs Fannie and Freddie facilitated over 50% of the mortgage market with government guarantees.

The 100 to 150 bps spread vs Jumbo mortgages played a direct roll in the housing boom and bust. Implicitly subsidized lower rates and higher LTV ratios (FHA) steroided up housing prices and Fannie/Freddie played a roll in both.

The argument that government policies didn't play a roll is nonsense. But the pro-government crowd never seems to see this.

[anduril]

jimmyk, this is a complicated area and one that, frankly, I'm not that interested in for its own sake. Here are a number of factors, though, that I think you should consider.

1. I think it's useful to distinguish between "regulatory capture" and what could be termed "Congressional capture." Often, the greater harm comes from special interests "capturing" Congress and pushing through legal and regulatory changes that have disastrous consequences. I would suggest that "Congressional capture" is the more serious problem than simply cozy relations between regulators and the regulated. And, believe me, I've seen it. I was called in when things had really gotten out of hand, but I still would point at Congress as the more serious problem than the regulators themselves. It's usually Congressional actions that cause more serious market distortions, as we certainly saw in most of our recent Bubbles, from the S&L Crisis on.

2. Glass-Steagall--and, again, I'm open to correction on this--had the virtue in my mind of being more of a blunt instrument than the usual "fine-tuned" regulations. It set up a few broad ("crude," the critics would say) requirements that prevented crazy speculation by commercial banks.

3. I suspect we're in substantial agreement re the Fed, and here your argument for "regulatory capture" is especially pertinent. Again, however, "Congressional capture" is a major part of the problem. There are a number serious commenters out there who maintain that Congress is virtually a creature of Wall St., which controls the Fed as well. Not to mention Treasury and staffing the Executives advisory staff.

4. One factor that seems to run through your comments, but which you don't identify as such, is the effect that government guarantees of various sorts can have. Here, again, I agree with you, but I would suggest that it's somewhat misleading to put this under the head of "regulatory capture." I would point to Congress, once again.

5. Finally, I'm entirely in sympathy with arguments in favor of minimizing regulation that imposes unnecessary burdens.

6. Well, really finally. What is to be done? Ideally, inject many wise men into the legislative process. Pretty hopeless, eh? There's always the line item veto, which would inject the executive into the legislative process in a more meaningful way. I maintain that the Line Item Veto decision (Clinton v. NY?) was the single most irresponsible SCOTUS opinion since Dred Scott. But none of this is likely because of the power of the shortsighted interest groups that oppose reform.

[Jim Rhoads a/k/a vnjagvet]

Rick:

History shows that bankers and major industrialists were very important supporters of Hitler, Mussolini, and Franco.

Kurtz's research into the archives of the socialist movement in the US is prodigious. It looks like Alinsky was not the only influence on The Won.

[Melinda Romanoff]

I like that one.

One point: The NY Fed was in charge of regulating Wall St., not The Fed. The NY Fed, traditionally, has been run by and for Wall St., the penultimate NY revolving door at the upper echelons of management and compliance.

[jimmyk]

Anduril, I agree about Congressional capture. I was just lumping that all under the rubric of regulatory capture. The regulators generally function at the pleasure of Congress, after all.

My view about Glass-Steagall is shaped by the fact that it had no bearing on the shadow banking system, such as the run on Prime Reserve money market fund as a consequence of its holdings of Lehmann commercial paper. Neither institution was a commercial bank. One could argue that Lehmann wouldn't have gotten in trouble if commercial banks had behaved themselves, but that's a stretch. Someone would have figured out how to leverage the subprime market and exploit the distortions created by Fannie, Freddie, the CRA, etc.

[Pagar]

"Kurtz has the Kendonesian commie pegged."
I'm pretty sure if we went back and found the 2008 JOM comments on Stanley Kurtz, many of us thought the same thing in 2008.
----------------------------------------------Things have gotten worse for America.
Reid intends to jam everything down our throats.

[Melinda Romanoff]

Ooops, should be "NY Fed was Specifically in charge..."

Sorry, that was vague.

[narciso]

He goes into a fair amount of detail with the MidWest Academy which seems to be the feeder,
for many of these currents.

[MayBee]

Jake Tapper:
The context of Holbrooke’s final words, however, is important. Some have suggested the remark reflected his final anti-war wish, but new information from the State Department says his last words came at the end of a lengthy exchange as doctor’s tried to get the bombastic Holbrooke to relax before surgery.

I'm chuckling at the seriousness with which Holbrooke's dying words are being treated, compared to the horrifying scandal of Libby going to visit the very much alive Ashcroft in the hospital.

[MayBee]

Oh, sorry, it was Gonzales and Andrew Card:

One of those aides was Alberto Gonzales, who was then White House counsel and eventually succeeded Ashcroft as Attorney General.

"I was very upset," said James Comey, who was deputy Attorney General at the time, in his testimony Tuesday before the Senate Judiciary Committee. "I was angry. I thought I had just witnessed an effort to take advantage of a very sick man, who did not have the powers of the attorney general because they had been transferred to me."

When Comey was the hero of the hour, it was horrifying to talk to a hospitalized man about his job.

[Clarice]

Well, THAT was so bad, Comey had to conspire with his friend Fitz to nail Libby. Imagine. Interfering with Comey's " turf". Can you imagine a more heinous crime?

[Porchlight]

I'm pretty sure if we went back and found the 2008 JOM comments on Stanley Kurtz, many of us thought the same thing in 2008.

Yes, I remember those threads very well. We all followed his foray into the CAC archives at UIC with interest, as well as his appearance on the Milt Rosenberg radio show. It sounds like he found a ton more stuff after that - exciting in terms of discoveries, but depressing/frightening in terms of what it all means.

[narciso]

Ah yes, the fact that the authorization on the TSP was going to expire, that was small beer

[ROA]

To be fair to Obama, what he is actually quoted as saying in the article is: "I think there's a consensus building that this may be one of the best Secretaries of State we've ever had in this country’s history."
But is it surprising that someone who thinks Social Security was originally just for widows and orphans thinks Clinton is one of the best Secretaries of State. He probably isn’t aware of any others except possibly Condoleezza Rice and Colin Powell. The man’s ignorance of American history is unbelievable.

[bunkerbuster]

FNMA was buying and creating mortgage-backed securities since at least the mid-1980s, as were private banks. The Community Reinvestment Act (I'm guessing this is what some mean by "redlining") started in the late 1970s.
Both survived the Reagan and Bush recessions and other shocks to the system and, indeed, even contributed to economic growth and stability.
So it makes no sense to blame them as the central or proximate cause for the Bush II depression, or "credit-freeze recession." While Frannie obviously made the situation worse, we know from decades of history that their business model was sound and, even, helpful to the economy.
The proximate cause of the meltdown was instead the removal by the SEC in 2004 of the regulatory limit on leverage by investment banks.
Without the 20-plus times leverage investment banks used, CDOs were not attractive. More important, perhaps, without the 20-plus times leverage, the banks would have been able to absorb declines in value without causing systemic collapse.
Those who would like to blame the sub-prime bubble on do-gooders haven't looked at the data, or are in denial of it.
Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007.
It's clear that excess leverage -- not a sudden doubling of do-gooderism under the Bush administration -- is what drove the doubling of sub-prime mortgage creation. And it was excess leverage that prevented banks from sustaining the losses in value.
The roll of artificially low interest rates is also important. These drove banks to scrape the barrel for any spread, and CDO spreads were just the thing at 20-plus leverage...

[Clarice]

Heh, ROA, cut him a break--He discovered 7 more states, including Eau Claire ("one of the biggest", I still can't find on my map.

[anduril]

jimmyk, I'll defer to you on that and leave you with two links that tend to support your view re Glass Steagall, but appear to favor reregulation, a 21st Century Glass Steagall--you can comment if you like:

Are Citigroup's troubles evidence that Glass-Steagall repeal was a colossal mistake?

Conclusion:

More important, the Glass-Steagall arguments miss what seems to me to be the real issue: that transaction-oriented investment banking has, now that we've been able to adjust previous years' returns for risk, turned out to be a bust. M&A work will eventually come back, and so will some amount of securities underwriting. But the vast securities-manufacturing business that evolved over the past three decades and went into overdrive after 2000 may never recover. This is what's meant by the shadow banking system, and it began slithering its way out of the reach of banking regulators in the 1970s, more than two decades before the Gramm-Leach-Bliley Act put an end to the Glass-Steagall separation of banks and Wall Street. Some advocates of Glass-Steagall repeal (Jim Leach in particular) actually saw their legislation as a way to rein in some of the shadow banking nonsense and bring it back under the control of banks and the watchful eye of bank regulators.

That didn't work out so well--in part because the chief banking regulator at the time, then Fed chairman Alan Greenspan--didn't believe in regulating. But obsessing over Glass-Steagall distracts us from the main flaw in our regulatory structure, which is that it allowed the rise of big leveraged financial institutions that weren't subject to the same rules as banks but now turn out to have been running the same (or even bigger) risks.

Kevin Drum, who has been doing a spectacular job of teaching himself about high finance over the past couple of months, sums it up nicely:

For my money, I keep coming back to the same thing: leverage, leverage, leverage. The key is to regulate leverage to reasonable levels and to regulate it everywhere. If it walks like a bank and quacks like a bank, then it's a bank and its leverage ratios should be regulated.

Out of the Shadows: Creating a 21st Century Glass-Steagall

Conclusion:

Implications

The loosening of Glass-Steagall prohibitions did not directly lead to the financial crisis of the past few years. But by focusing on the deregulation of banks, instead of managing the already growing systemic risk of shadow banks, the late 20th Century financial reforms may well have enabled the crisis.

Absent two broad-based repairs to financial regulation, it might well be impossible to reestablish a functioning shadow banking market. First, the moral hazard reinforced by the serial rescues of shadow banks must be dampened through the adoption of a credible resolution regime for systemically important firms. Second, a rationalized structured credit market (e.g. one with appropriate checks on the discretion of issuer-paid rating agencies) is a prerequisite for a resilient shadow banking system. Structured credit, after all, is the principal means by which shadow banks take credit and interest rate risk.

If those broad-based reforms are made, then policymakers may go on to tailor a new Glass-Steagall regime — one that suited to the 21st Century:

Create prudential regulation for systemically important shadow banks. As recent events painfully illustrate, large non-banks that have substantial shares of wholesale funding markets create disruptive ripple effects when they fail. Such effects are at least as disruptive and as expensive to taxpayers as the failure of depositories. At minimum, such shadow banks should be subject to the same limits on risk-taking as banks. Indeed, given such firms’ deep interconnection within wholesale funding markets, limitations on credit-intensive asset concentrations and proprietary trading might even be made more stringent than for banks.

Eliminate shadow banks’ capital arbitrage. In a similar vein, systemically important shadow banks should be subject to the same capital standards as banks. Allowing disparate capital frameworks encourages capital to migrate to the most permissive regime. That, in turn, encourages distorted, pro-cyclical credit allocation.

Eliminate shadow banks’ funding arbitrage: Stress test liquidity positions. The crisis has underscored the fragility of shadow banks’ funding model, which relies on confidence-sensitive wholesale markets to support credit-intensive assets. For systemically important shadow banks, at least, regulators should stress test liquidity buffers in multiple, simultaneous dimensions, including asset-liquidity stresses (e.g. assume no sales of structured credit without a 40% haircut for 6 months); funding market stresses (e.g. assume sub-AAA unsecured markets are shut for 12 months); and yield curve stresses (e.g. immediate long-end increase by 100 bps, short end increase by 300 bps).

Policymakers stood silent through decades of the shadow banks’ emergence as a distorting and destabilizing force in the U.S. financial system. A renewed approach to Glass-Steagall, informed by the lessons of the crisis, could address that problem at long last.

[ROA]

And a new language - Austrian.

[anduril]

I believe my last post with the long paste jobs has elements for both jimmyk and bunkerbuster. Perhaps they can both comment on the Kevin Drum quote.

[lyle]

"I think there's a consensus building that this may be one of the best Secretaries of State we've ever had in this country’s history."

Just who populates this consensus? And name one policy success she's had. "Reset Buttons"? And what is it about pointy head libs that they always have to lionize their party leaders? How long before we hear how exceptionally brilliant Holbrooke was?

[Jane (get off the couch - come save the country)]

They damn well better not pass that omnibus bill.

[narciso]

Gibbs showing that sheepskin has it's uses, calling for 'adulthood in DC' a vain dream, considering what they just did to Michelle
Rhee.

[jimmyk]

bubu, if you would study a bit before posting, you wouldn't embarrass yourself so much. The CRA in the 1970s wasn't the same as the CRA in the 1990s. Ditto for FNMA. They changed their business model, including the decision to invest in subprime. The increase in "do-gooderism" was mainly in the Clinton administration. Bush, as is well-known, tried to rein in Fannie and Freddie but Bahney Fwank, Maxine Waters, and friends blocked him.

Yes, leverage mattered, but the fact that F/F stood there as apparently a "buyer of last resort" played a big role.

[Janet]

Just who populates this consensus?

Yeah lyle. I would love someone to ask, "WHO?".
Like Couric questioning Condi Rice...many said there were no WMDs..."WHO? Katie?" "Name some names."
All the Dems are brilliant, maybe too smart...& all the Republicans are dumb.

[bunkerbuster]

``The increase in "do-gooderism" was mainly in the Clinton administration.''
That data disprove that. Subprimes doubled under Bush. Are you going with ignorance, or denial, Jimmy?

[RichatUF]

Maybe I ought to give it a try.