By PAUL KRUGMAN Published: March 31, 2008 http://www.nytimes.com/2008/03/31/o...em&ex=1207195200&en=c2547ed31f19974f&ei=5087 Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom. You now understand the principle behind the Bush administration’s new proposal for financial reform, which will be formally announced today: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive. The financial events of the last seven months, and especially the past few weeks, have convinced all but a few diehards that the U.S. financial system needs major reform. Otherwise, we’ll lurch from crisis to crisis — and the crises will get bigger and bigger. The rescue of Bear Stearns, in particular, was a paradigm-changing event. Traditional, deposit-taking banks have been regulated since the 1930s, because the experience of the Great Depression showed how bank failures can threaten the whole economy. Supposedly, however, “non-depository” institutions like Bear didn’t have to be regulated, because “market discipline” would ensure that they were run responsibly. When push came to shove, however, the Federal Reserve didn’t dare let market discipline run its course. Instead, it rushed to Bear’s rescue, risking billions of taxpayer dollars, because it feared that the collapse of a major financial institution would endanger the financial system as a whole. And if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks, the implication seems obvious: they should be regulated like banks, too. The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” That’s banker-speak for getting rid of regulations that annoy big financial operators. To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake. Thus, in a draft of a speech to be delivered on Monday, Henry Paulson, the Treasury secretary, declares, “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.” And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. As for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.” The administration, then, has learned nothing from the current crisis. Yet it needs, as a political matter, to pretend to be doing something. So the Treasury has, with great fanfare, announced — you know what’s coming — its support for a rearrangement of the boxes on the org chart. OCC, OTS, and CFTC are out; PFRA and CBRA are in. Whatever. Will rearranging these boxes make any difference? I’ve been disappointed to see some news outlets report as fact the administration’s cover story — the claim that lack of coordination among regulatory agencies was an important factor in our current problems. The truth is that that’s not at all what happened. The various regulators actually did quite well at acting in a coordinated fashion. Unfortunately, they coordinated in the wrong direction. For example, there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations. The occasion symbolized the shared determination of Bush appointees to suspend adult supervision just as the financial industry was starting to run wild. Oh, and the Bush administration actively blocked state governments when they tried to protect families against predatory lending. So, will the administration’s plan succeed? I’m not asking whether it will succeed in preventing future financial crises — that’s not its purpose. The question, instead, is whether it will succeed in confusing the issue sufficiently to stand in the way of real reform. Let’s hope not. As I said, America’s financial crises have been getting bigger. A decade ago, the market disruption that followed the collapse of Long-Term Capital Management was considered a major, scary event; but compared with the current earthquake, the L.T.C.M. crisis was a minor tremor. If we don’t reform the system this time, the next crisis could well be even bigger. And I, for one, really don’t want to live through a replay of the 1930s.
Krugman nails it. None of the proposed regulations even touch upon the areas that started this whole fiasco.
Krugman is so blinded by his politics that nobody takes him seriously anymore. He has ceased to be objective due to his hatred of Bush
The Bush administration is so blinded by it's ideology that nobody takes it seriously anymore. It has ceased to be relevant due to an utter lack of credibility. This is something for the next administration. The current trainwreck in office can't be trusted.
Nailed it? more like a swing and miss. In case you didn't know, the subprime mess has happened, and no amount of regulation would have stopped it from starting. Krugman's articles are becoming increasingly unreadable, sounding more and more like someone who has no clue.
Yeah it's about time the Federal Reserve Banking Corporation's powers got expanded already. In fact, why not just hook up every man, woman, and child in this country with an IV in their forearm so that the 'Board of Governors' can start withdrawing the blood directly whenever and as they see fit!
Not to avoid your query, but it would seem far more fortuitous for you to explain how no regulation (that is, no possible/conceivable regulation, it was wholly impossible) could have prevented this. Given the very broad context of your statement, I made mine.
Since we're playing these games, I know what would have prevented it. Does anyone really want to hear?
I see, first say "not to avoid your query" but then actually avoid the query, that's original. A simple "I don't know" would be fine as well. Now to answer your question, a large part subprime mess is driven by the investors who wanted to buy these papers (ABS, MBS, CDO, CDS etc.) Now to satisfy investors' appetite and make some money for themselves, the wall street dealers created a lot of different types of new products. The problem is most of the investors and rating agencies did not have a good understanding how these products work. Thus the blow up. To prevent the subprime thing from starting, the regulators would have to understand any new product as soon as it hits the market, and able to project the worst case scenarios. Basically government regulators would have to be a lot better than the "experts" at shops like Moodys. Which is impossible consider there could be hundreds of new deals coming out every month. You know what's regulating the market now? The investors, there are almost no new deals out, because no one is buying them. A lot of the products might as well be dead. So yeah, unless you tell the IBank/Dealers they can not create any new financial products in the future, no amount regulation is going to prevent another run up on some new big thing that might eventually blow up. The best you can do is possibly catch it a little earlier.
Don't just print money to loan to banks. And if that's too radical, at least loan it to them at reasonable interest rates. We (collectivist we) give them free money, create a bubble, and then when it starts to pop, we give them nearly free money to keep it alive.
Ouch. My disagreement was really more in the absolutism of your statement. Touche though - I am not sure how regulation could prevent this, but I am positive it is not impossible. It would appear to me that the system is out of whack when ratings are unable to guage just what a ****pile of investments some of these companies had. Catching it earlier is absolutely the end goal - that way the more conservative investments actually _are_ conservative.
S&P is still rating B&S bonds as "investment" grade. S&P are running the risk that no one in their right mind will take them or their ratings seriously.
Well the source of the problem is that many of the sub-prime mortgages are defaulting. If they did not default it doesn't make any difference about the CDO's etc. A simple regulation requiring folks to pay say 20% down, and qualify for a fixed mortgage at a reasonable limited percentage of their income would do it. No zero down, no principle mortgages that adjust upward greatly in a couple of years etc. Other simple regulations would help.
Why should we regulate this? Why not just allow the banks to take the risks as they see fit, and not bail them out if they fail.
I believe the argument is that, like it or not, if large banks fail it can really hurt the economy. How about bailing them out at 20% interest? I'd get behind a little taxpayer payback.
I understand that, but if we put consequences back in the economy, people will make better decisions with their money and we can take the roller coaster ride out of the economy. We do insure personal accounts within those banks (up to $100,000), and I really don't have a problem with that, but the banks should be allowed to fail.
As a member of the radical 30% fringe that still approves of the job Bush has done as President, li'l t is in a unique position to comment on the objectivity of others.
