Will Regulations Save Us?

The supposed saving grace of the Geithner bank bailout is that at least regulations will be imposed that would eliminate the possibility for this to ever happen again. At least that's Europe's view, as well as Obama's long-term position:

But I think the most important thing that we can do is make sure that we put in a bunch of financial regulatory mechanisms to prevent companies like an AIG holding the rest of us hostage. Because that's -- that's the real problem.

The problem is not just what's happened over the last six months. The problem is what was happening for years, where people were able to take huge, excessive risks with other people's money, putting the entire financial system at risk -- and there were no checks, there were no balances, there was nobody overseeing the process.

Just enforcing the laws already on the books would represent an improvement over, say, the past thirty years. But any confidence that some kind of regulatory overhaul is imminent gets sapped by the first major "reform".

The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use “significant judgment” in valuing assets [...]

Fair-value, also known as mark-to-market accounting, requires companies to set values on most securities every quarter based on market prices. Wells Fargo & Co. and other companies argue the rule doesn’t make sense when trading has dried up because it forces banks to write down assets to fire- sale prices.

What this boils down to is that the government will allow banks to pretend that their worthless assets are worth significantly more than what the market will pay for them. In other words, banks will rescue themselves from insolvency by using the magical power of bullshit.

You can't blame this one on the Bush Administration.

Meanwhile, the next regulatory move appears to be vesting more power in the Fed, which failed to regulate the banks the last time. I agree with a new authority to oversee massive financial industry risk and their exotic products, but not with an unaccountable and secretive board that won't even account for the trillions of dollars in hastily printed money they've spent on bank assets.

Regulators have plenty of authority right now. Their reticence to really challenge elites and risk a short-term loss in GDP to protect a larger meltdown reflects a lack of will.

Looking back with 20/20 hindsight the issue isn’t so much that we needed better “rules” as it is that we needed regulators we took seriously the idea that cracking down on private sector funny business is their job. Instead, we seem to have mostly had regulators who regarded the laws on the books as an unfortunate and anachronistic departure from a pure laissez faire ideal. So you got things like the SEC prosecuting celebrities on tenuous charges, but no real oversight of a mortgage sector run amok. When you look back at the trajectory leading up to the crisis, the problem of “deregulation” isn’t so much that there’s some particular rule that was removed during the Greenspan Era that could have saved us as it is that the mindset that drove the legislative agenda of deregulation ultimately proved paralyzing to policymakers.

Certainly, if anything would destroy the mindset of Randian laissez-faire capitalism, it would be the events of the past six months. But given the clear signs from this allegedly "socialist" Administration thus far, I'm not so sure.