Originally posted by: dderidex
Originally posted by: glenn1
Originally posted by: dderidex
I'm getting two very conflicting perspectives on the meta-cause of this.
One group notes that there has been massive 'deregulation' under Bush's and Clinton's administrations, leading to permissive lending practices that led to the current banking crisis. The argument is that legislation existed that would have prevented many of the lending practices currently ruining us, and merging of business into unstable entities, and this has been systematically dismantled.
The other group (mostly Ayn Rand fans) cries 'foul!' and argues that there are still so many regulations forced on the industry that the 'free market' cannot operate - government 'forcing' banks to make bad loans through policies (etc) - and the meddling due to Fannie and Freddie operating with reckless abandon, apparently sanctioned by the government, is the cause of the mess.
Neither argument appears to cite their sources very well, though, and so I'm left wondering which is more likely correct? Is massive deregulation at fault? Is over-regulation at fault? Was the whole mess inevitable, and nothing any government or private business could have done would have been able to stop it?
Both are somewhat correct, yet are still misleading.
First, the amount of regulations don't matter so much as what they cover, and how willing the participants are to obey them. There were and are plenty of rules against fraud, yet still Enron happened - not a fault of lax regulations, but rather of dishonest people willing to intentionally break the law.
Secondly, in the case of the current crisis, it wasn't a lack of regulations so much as a complete breakdown in the assumptions everyone was using. One of the results of a former crisis (Enron again) was that regulators required companies to institute risk modeling and control measures. Well, it wound up that everyone on the Street was using the same model, and when it failed it failed catastrophically due to faulty premises.
Lastly, it's become apparent recently that regulatory decisions which were rational at the level of the individual broker-dealer, collapsed completely at an aggregate level when stresses are placed on the market due to failures of products such as Auction Rate Securities. Couple that with a hidebound "rules based" rather than "principles based" regulatory structure that couldn't keep up with events as they unfolded, and you have a complete meltdown.
I understand what you are saying, but it doesn't really address the...let me pull a combo from above..."meta argument".
Specifically, Ayn Rand followers (also: most Libertarians, etc) tend to argue "no legislation is best - companies poorly run will fail, making room for more space in the market for more competitive smaller companies. Lower prices for all, better jobs, and harder work is better rewarded."
One of your comments I could ask to be expanded on that might help address this:
it wound up that everyone on the Street was using the same model, and when it failed it failed catastrophically due to faulty premises.
...what are these 'faulty premises', and how did 'everyone' end up using them? Is it possible these are related to the post-Enron legislation you mention? In that the argument could be made 'if not for government intervention forcing a certain policy on companies, they would all have found their own model, and the financial failure wouldn't have been as bad or widespread'.
Not saying it's my argument - but I am familiar enough with the other side to see them jumping right to that. Seems like any time you would point out collective behavior, the argument becomes 'this is only because of government intervention, left to their own devices, each company would come up with its own behavior'.
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