Wednesday, April 29, 2009

Eliminating Regulation Led to Our Financial Crisis

Response to: Note to Regulators: Beware the Montana Paradox

Understood. My point is that the regulators were not empowered. Congress eliminated the regulations that held things in check at the behest of those given them large cash contributions. In addition, regulators can be greatly hampered by the leadership of the organizations they reside in. Regulators are prevented from regulating by the political appointees at the top of their organizations (or by politicians not funding the organization - think FDA food safety failures...).

There certainly is a difference of opinion over what is appropriate regulation. And then once the appropriate regulation is agreed to, what are appropriate response to real world situations is still an open question. I find that many today still don't understand how much a failure of proper regulation is response for our current situation. That failure took at least 4 forms: failed policy of removing appropriate regulation, failed political appointments of regulatory bodies with those that believed regulation was by its nature bad and fought to not enforce even the regulations still in the law, restricting funds to regulatory agencies (this is a common strategy when eliminating the laws that required regulation, still did not satisfy those that wished to eliminate the governments proper regulatory role in a capitalist system) and fourth, the failure of regulators to act properly after those 3 failures were in place.

To me the system problem was above the people problem of regulators failing to act well. It seems to me blaming the regulators is equivalent to blaming the workers. After policy had managed to strip huge amounts of sensible regulation to then blame the workers is not the best way to look at the cause of the failures in my opinion. After crippling regulatory organizations (by changes to the law due by politicians), starved for resources (again by politicians) and led by those fighting the regulatory role of their organization and instituting policies prohibiting sensible regulation (aging by politicians) to then blame those workers (regulators) who failed to properly regulate just seems the wrong analysis in my opinion.

The system was changed to eliminate regulation at the behest of those proposing that regulation was bad for the economy. The results of removing regulation do not seem to support their contention.

I agree politicians made poor policy decisions to encourage more home ownership. That was a part of the problem. To me the main thrust of the problem was not that but the continued erosion of the restrictions on excessive risk taking by financial firms and the removal of regulation that had been in place since the great depression, after a collapse of the financial system.

Anyway, those that appose regulation of financial markets control DC, even now. So there is very little danger (for those that see it as a danger) of putting regulation of financial markets back into the shape it was before the recent few decades created the unregulated current environment. The amount of cash those benefiting from the current system have to give to politicians to continue to the current system is in no significant danger.

I must say Phil Graham is not someone that has much credibility on financial matters with me. He was as responsible as anyone else for eliminating the regulation that was in place previously and received huge amounts of donations from those in the financial community to pursue strategies that benefited them.

So, I guess we disagree on the main causes of the failure of many financial firms until they were bailed out by the government. Thankfully, we are allowed to have our own opinions.

Related: Failure to Regulate Financial Markets Leads to Predictable Consequences - Monopolies and Oligopolies do not a Free Market Make - Too Big to Fail - Sound Canadian Banking System - posts on economics

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