Alan Meltzer Strikes Again!

"Last year the New York Times ran several articles about the end of capitalism. ... Then--just in the nick of time--we were allegedly saved by timely, forceful and intelligent government actions. The groundwork was laid for the next phace: more government regulation of financial and economic life. Left out of this narrative, is the government's disastrous mortgage and housing policy. Without the policies followed by Fannie Mae and Freddie Mac--and the destructive changes in housing and mortgage policies, like authorizing subprime and Alt-A mortgages for impecunious borrowers--the crisis would not have happened. ... Would bankers have made so many errors if there had never been a too-big-to-fail policy? ... Quite the opposite. The new financial regulations, spearheaded by Sen. Chris Dodd (D., Conn.), only bring back too big to fail by authorizing a Systemic Risk Council headed by the Treasury Secretary. ... Consider the Basil Accord, passed following bank failures in Germany and the US in the 1970s. This was supposed to reduce banking risk by requiring banks to increase capital if they incresed holdings of risky assets. But financial markets circumvented it by putting the risky assets off their balance sheets. Unusual? Not at all. ... This is because regulation is static, while markets are dynamic. If markets don't circumvent costly regulations ar first they will find a way later. The answer is to use regulation to change incentives by making the bankers and their shareholders bear the losses. ... Secretaries Timothy Geithner and Hank Paulson told Congress at the AIG hgearing earlier this month that they faced a choice: a bailout or another Great Depression. This is not true. ... The market is not perfect. It is run by humans who make mistakes. But the same humans run government where they make different, often more costly, mistakes for which the public pays. ... Regulators talk a lot about systemic risk. They do not--and probably cannot--give a tight operational definition of what this means. So setting up an agency to prevent systemic risk, as Mr. Dodd has just proposed, is just another way to pick the public's purse. ... We will not get sound banking until the CEOs of the large banks and their shareholders are forced to pay for their mistakes", my emphasis, Allan Meltzer (AM) at the WSJ, 19 March 2010, link:

http://online.wsj.com/article/SB10001424052748704231304575092141898417002.html.

As usual, I agree with AM. AM says it all. Imagine, incentives count!