Wednesday, August 13, 2008
"The short take on the economic crisis of the 1970s was that regulation failed. Price controls failed; high taxes failed; regulation was outmoded. The mortgage and banking crisis of 2008 feels diametrically different. What failed this time were markets. The lenders were supposed to regulate mortgage borrowing--and the credit-rating firms who monitored them--failed utterly. The investors whose job it was to monitor the capital of financial institutions were asleep at the swich. ... The [Fed] and the U.S. Treasury have lately widened the federal safety net more quickly and more aggressively than at any time since the New Deal era. ... And not since the Depression ... has the government bought significant equity in private firms, as the Treasury has sought the authority to do so in the case of Fannie Mae and Freddie Mac. At least during the 1930s, legislation followed months of deliberation and public hearings. The proferred fixes to today's fast-moving crises are worked out hastily and in private. At a visceral level, it is deeply upsetting when institutions that once reaped fabulous profits (a goodly share of which were snared by their executives) are granted the protection of Uncle Sam. ... More troubling than the unfairness is the potential that the solutions will exacerbate moral hazard: that people who feel innnoculated will run greater risks", my emphasis, Roger Lowenstein (RL) at the NYT, 27 July 2008.
I disagree with RL's conclusion: "What failed this time were markets". Uncle Sam's policies got what he expected: the privatization of profit and socialization of loss. Why is Treasury full of "former" Goldman Sachs guys? Why does the SEC protect the rating agencies?