Tuesday, June 10, 2008

Whither banking regulation? 
McArdle nails it:

The housing bubble created a powerful illusion: that low income lenders with bad credit were actually quite profitable to lend to. That's because the rising housing prices allowed borrowers in trouble to refinance rather than default. There's no reason to think that the originators were any less deluded about the credit risks than the investors. The no-doc, option and negative amortization ARMS were not a secret; everyone knew what was going on. People bought mortgage bonds anyway in what now looks like a stunning piece of idiocy.

When I try to get people to specify, beyond those four rather anodyne suggestions, we should do, there's a lot of hemming and hawing. Even the left-wing think tankers sort of look at their shoes and whisper "We need a better regulator". At which point even the left-wing journalists in the audience start asking "Where are we going to find regulators who understand this better than the guys at Goldman Sachs--and are willing to work for, say, a GS-13 salary?" The only people who confidently state that they have a surefire master plan to fix the problem are, not to put too fine a point on it, morons with very limited understanding of financial markets. These people generally start by talking about how the Bear Stearns crisis can really be traced back to the repeal of Glass-Steagall, then almost immediately reveal that they know nothing of Glass-Steagall other than its name.

Preach it, sister!

The problem isn't the lack of regulation. Federal Reserve member banks and commercial banks are already heavily regulated. And the people who do the dirty work of regulation are NOT going to be smarter than, or have a superior understanding of markets, than the people who actually run places like Bear Stearns and Lehman Brothers and Wachovia and Wells Fargo and Countrywide, to name a few KINDS of financial institutions caught up in the craze to varying degrees.

The argument for regulation is never that the government is smarter. The more I look at regulation and compliance issues, first as a compliance copywriter for a variety of financial institutions and now as a budding insurance agent, the more I marvel at how stupid regulators are, and how companies bend themselves into absurd contortions in in order to anticipate the idiocy of the dumbest regulators.

Instead, the argument for regulation is that the government provides a hedge against the profit motives of these institutions and their brokers.

But government can ONLY provide such a hedge if the political will exists to do it. Perhaps we could have contained the damage the housing bubble wreaked, for example, on minority communities (obviously favorite markets of subprime mortgage brokers), by repealing red-lining laws and allowing banks more freedom NOT TO LEND.

Yeah. THAT'S going to fly in Congress.

If the Bush Administration had actually pushed to implement regulatory measures that MIGHT have contained the damage, the Demtards in Congress would be SCREAMING.

Or perhaps we could have contained the damage to the nation's dumbest homeowners by prohibiting interest-only mortgages, or balloon loans, or 1% mortgages... thus depriving the lower-middle class family their God-Given Right To Infinitely Expanding House Prices.

But the problem is that each of these products makes a lot of sense for certain buyers. They are not bad products at all. An interest-only loan might be entirely appropriate for someone with a lot of other assets that he expects to earn a superior return on his investment compared to house price appreciation. Zero down might make a lot of sense for someone with the assets to move in a pinch, but who does not wish to incur a capital gains hit on appreciated assets he'd have to sell to reach the down payment.

Someone in a profession that is frequently targeted in lawsuits - say, obstetricians - may have a need for such products from an asset protection point of view and may wish to encumber his house as much as possible to ward off litigants.

The danger now is that politicians will push the Fed and Treasury Departments into ill-advised 'feel-good' regulatory stupidity, out of desperation to be seen doing something. Look to economic and financial chuckleheads like Barney Frank, Hillary Clinton and Barack Obama to lead the charge. But in so doing, stupid regulation will have the opposite effect intended, further restricting liquidity just as we need it most.

Splash, out


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