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Too Few Regulations? No, Just Ineffective Ones

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  • Too Few Regulations? No, Just Ineffective Ones

    Catching up on reading this morning...missed this excellent piece last week.

    http://www.nytimes.com/2008/09/14/bu...rssnyt&emc=rss

    September 14, 2008
    Economic View
    Too Few Regulations? No, Just Ineffective Ones


    By TYLER COWEN

    THERE is a misconception that President Bush’s years in office have been characterized by a hands-off approach to regulation. In large part, this myth stems from the rhetoric of the president and his appointees, who have emphasized the costly burdens that regulation places on business.

    But the reality has been very different: continuing heavy regulation, with a growing loss of accountability and effectiveness. That’s dysfunctional governance, not laissez-faire.

    When it comes to financial regulation, for example, until the crisis of the last few months, the administration did little to alter a regulatory structure that was built over many decades. Banks continue to be governed by a hodgepodge of rules and agencies including the Office of the Comptroller of the Currency, the international Basel accords on capital standards, state authorities, the Federal Reserve and the Federal Deposit Insurance Corporation. Publicly traded banks, like other corporations, are subject to the Sarbanes-Oxley Act.

    And legislation that has been on the books for years — like the Home Mortgage Disclosure Act and the Community Reinvestment Act — helped to encourage the proliferation of high-risk mortgage loans. Perhaps the biggest long-term distortion in the housing market came from the tax code: the longstanding deduction for mortgage interest, which encouraged overinvestment in real estate.

    In short, there was plenty of regulation — yet much of it made the problem worse. These laws and institutions should have reined in bank risk while encouraging financial transparency, but did not. This deficiency — not a conscientious laissez-faire policy — is where the Bush administration went wrong.

    It would be unfair, however, to blame the Republicans alone for these regulatory failures. The Democrats have a long history of uncritically favoring expansion of homeownership, which contributed to the excesses at Fannie Mae and Freddie Mac, the humbled mortgage giants.

    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.

    Still, the Bush administration’s many critiques of regulation are belied by the numbers, which demonstrate a strong interest in continued and, indeed, expanded regulation. This is the lesson of a recent study, “Regulatory Agency Spending Reaches New Height,” by Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, and Melinda Warren, director of the Weidenbaum Center Forum at Washington University. (Disclosure: Ms. de Rugy’s participation in this study was under my supervision.) For the proposed 2009 fiscal budget, spending by regulatory agencies is to grow by 6.4 percent, similar to the growth rate for last year, and continuing a long-term expansionary trend.

    For the regulatory category of finance and banking, inflation-adjusted expenditures have risen 43.5 percent from 1990 to 2008. It is not unusual for the Federal Register to publish 70,000 or more pages of new regulations each year.

    In other words, financial regulation has produced a lot of laws and a lot of spending but poor priorities and little success in using the most important laws to head off a disaster. The pattern is reminiscent of how legislators often seem more interested in building new highways — which are highly visible projects — than in maintaining old ones.

    The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated. To be sure, these institutions contributed to the severity of the Bear Stearns crisis and to the related global credit crisis. But it’s not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies.

    In other words, the regulation that we have didn’t work very well.
    There are 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.

    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.

    Under these circumstances, the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it. Identifying underregulated sectors in hindsight isn’t a useful guide for what to do the next time.

    Both presidential candidates have endorsed regulatory reform, but they have yet to signal that it will become a priority. That isn’t surprising. Fixing these problems may seem a very abstract way of helping the average citizen, and it will certainly require taking on special interests. It’s easier to tell voters that the regulators have taken care of last year’s problem, even if that accomplishes nothing for the future.

    In the meantime, if you hear a call for more regulation, without a clear explanation of why regulation failed in the past, beware. The odds are that we’ll get additional regulation but with even less accountability and even less focus on solving our very real economic problems.

    Tyler Cowen is a professor of economics at George Mason University.


  • #2
    This.

    The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated.
    Does not equal that.

    In other words, the regulation that we have didn’t work very well.
    Tsk, tsk. The Professor would be better served addressing information which contradicts his premise, as opposed to Bushinizing it.
    From this day forward, I no longer shall tinker with the machinery of death.

    For more than 20 years I have endeavored-indeed, I have struggled-along with a majority of this Court, to develop procedural & substantive rules that would lend more than the mere appearance of fairness to the death penalty endeavor.


    I feel morally and intellectually obligated simply to concede that the death penalty experiment has failed.

    The path the Court has chosen lessens us all. I dissent.

    Comment


    • #3
      The worst damage to transparency and accountability occurred pre-Bush, from The Song of Reagan thru the repeal of Glass-Steagall.
      Damn these electric sex pants!

      26+31+34+42+44+46+64+67+82+06 = 10

      Bring back the death penalty for corporations!

      Comment


      • #4
        Great article. That's exactly what Obama has been saying.

        Comment


        • #5
          Originally posted by ppg shg View Post
          Tsk, tsk. The Professor would be better served addressing information which contradicts his premise, as opposed to Bushinizing it.
          It's a good thing you are one of those rare birds who can examine issues dispassionately and not be reduced to political cliches.

          A sharp mind like yours would be a terrible thing to waste on pettifog.

          Comment


          • #6
            from wikipedia....

            Cowen has been classified as a "libertarian bargainer" - someone of libertarian ideals who is not so radical that he cannot influence the "currently powerful".[2] This puts him closer to Friedrich Hayek than an anarcho-capitalist such as Murray Rothbard or an anti-establishmentarian like Ludwig von Mises. In a 2007 article entitled "The Paradox of Libertarianism," Cowen argued that libertarians "should embrace a world with growing wealth, growing positive liberty, and yes, growing government. We don’t have to favor the growth in government per se, but we do need to recognize that sometimes it is a package deal." His argument was subsequently criticized by Bryan Caplan[3], Justin Raimondo[4], Christopher Westley[5] and Doug MacKenzie.[6]



            Don't let him sell out the real libertarians.
            v


            Comment


            • #7
              Originally posted by King View Post
              It's a good thing you are one of those rare birds who can examine issues dispassionately and not be reduced to political cliches.
              Is Bushinizing a political cliche?

              In any event, these statements stand in contrast.

              Quote:
              The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated.

              Quote:
              In other words, the regulation that we have didn’t work very well.


              The author would be better served in explaining this contradiction, and not trying to make it appear that it fits his argument.
              From this day forward, I no longer shall tinker with the machinery of death.

              For more than 20 years I have endeavored-indeed, I have struggled-along with a majority of this Court, to develop procedural & substantive rules that would lend more than the mere appearance of fairness to the death penalty endeavor.


              I feel morally and intellectually obligated simply to concede that the death penalty experiment has failed.

              The path the Court has chosen lessens us all. I dissent.

              Comment


              • #8
                scary. even libertarians, not just republicans, have figured out that the government is a great place to go when your free range capitalistic ideas cannot survive on their own.
                v


                Comment


                • #9
                  Originally posted by kjoe View Post
                  scary. even libertarians, not just republicans, have figured out that the government is a great place to go when your free range capitalistic ideas cannot survive on their own.
                  Corporate Libertarians. They wouldn't be in position to raid the treasury if they didn't deserve it.
                  Damn these electric sex pants!

                  26+31+34+42+44+46+64+67+82+06 = 10

                  Bring back the death penalty for corporations!

                  Comment


                  • #10
                    Originally posted by ppg shg View Post
                    Quote:
                    The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated.

                    Quote:
                    In other words, the regulation that we have didn’t work very well.


                    The author would be better served in explaining this contradiction, and not trying to make it appear that it fits his argument.
                    Sure, because you left out this sentence in between:

                    But it’s not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies.
                    There is no contradiction when the context is left in place.

                    Comment


                    • #11
                      Originally posted by dredbyrd View Post
                      Corporate Libertarians. They wouldn't be in position to raid the treasury if they didn't deserve it.
                      Corporatists Libertarians

                      Comment


                      • #12
                        Originally posted by King View Post
                        Corporatists Libertarians
                        You know that he doesn't mean 'corporate' in the same sense as 'Corporatism.'

                        Don't be fatuous, King. It doesn't suit you.

                        Moon
                        Moon Man
                        Senior Member
                        Last edited by Moon Man; 09-24-2008, 03:31 PM.

                        Comment


                        • #13
                          Originally posted by King View Post
                          There is no contradiction when the context is left in place.
                          That statement is just supposition, and it appears that it stands in contrast to the fact that it was the unregulated sector which is the foundation upon which the crisis is built.

                          The premise of the article appears to be that the regulation that we had didn't work very well, but concedes that in this instance there was no regulation and does not explain how no regulation equates to a failure of regulation.

                          Why not simply acknowledge how the lack of regulation of this particular market was a failure, but the overall framework of regulation needs to relaxed or reformed to lessen regulation in some areas, and strengthen it in others, like this case, and then actually explain the last paragraph, which is totally unsupported by anything written before it.
                          From this day forward, I no longer shall tinker with the machinery of death.

                          For more than 20 years I have endeavored-indeed, I have struggled-along with a majority of this Court, to develop procedural & substantive rules that would lend more than the mere appearance of fairness to the death penalty endeavor.


                          I feel morally and intellectually obligated simply to concede that the death penalty experiment has failed.

                          The path the Court has chosen lessens us all. I dissent.

                          Comment


                          • #14
                            Originally posted by Moon Man View Post
                            You know that he doesn't mean 'corporate' in the same sense as 'Corporatism.'
                            I was pointing out the absurd contention that a "corporate libertarian" could be raiding the treasury. Any "corporate" dude who is found raiding the treasury is almost by definition a "corporatist" and not a libertarian, right?

                            Mine was a subtle point...that you missed it can only be explained by jet lag.
                            King
                            Senior Member
                            Last edited by King; 09-24-2008, 03:45 PM.

                            Comment


                            • #15
                              Originally posted by King View Post
                              I was pointing out the absurd contention that a "corporate libertarian" could be raiding the treasury. Anyone "corporate" dude who is found raiding the treasury is almost by definition a "corporatist" and not a libertarian?

                              Mine was a subtle point...that you missed it can only be explained by jet lag.
                              Naaaah, you're not that clever.

                              Moon

                              Comment

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