Tuesday, September 16, 2008

Grandstanding Lehman and Fred/Fan

As you might expect, both Presidential candidates have roundly denounced all the 'scoundrels' in DC.

And they both fell short--and are full of crapola. Megan McArdle provides the takedowns.

We start by asking what beefier SEC enforcement was supposed to do to portfolios and banks that were in full legal compliance with the SEC rules until the subprime market collapsed. Aside from standing there with their superdetective tweezers and magnifying glass in hand, clicking their tongues and saying, "That looks like it might be infected. You should get it looked at."
As an aside, we point out that the more lightly regulated hedge fund industry is weathering this storm better than the more heavily regulated banks.

Then we move on to Gramm-Leach-Bliley, bugbear of Glass-Steagall nostalgists everywhere. We first observe that GLB passed under the Clinton Administration. We second note that it passed in 1999, too late to have had any effect on the stock market bubble.

On the situation in general:

What those people were talking about, by and large, was the easy credit provided by the central bank, over which Bush has no direct control. During both speculative booms, there were people who thought that the markets were in a bubble, and that Greenspan/Bernanke should have acted to shut it down. But prior to the actual crashes, those people were in a minority. The considered opinion of Robert Shiller, probably the greatest living expert on bubbles (and a Democrat) is that any Fed or regulatory action would have had at best marginal effect on the housing bubble--or at least so he told me when I interviewed him.

At the Federal level, we might have forbidden securitization, or more exotic instruments. But this wasn't even on peoples' radar before the subprime market went sour. The bank regulators could probably have done something to tighten lending standards, but this would have amounted to saying "Don't lend money to poor people". A Democratic congress saying "don't lend money to poor people".

Too much cash--from overseas as well as domestically.


This was not some criminal activity that the Bush administration should have been investigating more thoroughly; it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit. (These are, mind you, the same people that five years ago the Democrats wanted to help enjoy the many booms of homeownership.) Lehman, Bear, Merrill and so forth did not sneakily lend these people money in the hope of putting one over on the American taxpayer while ruining their shareholders and getting the senior executives fired. They got it wrong. Badly wrong. So did everyone else.

...to believe that a Democrat could have done better is to assert that a Democratic president would have found a Fed chair who would pay less attention to unemployment, or a bank regulator who would have tried harder to prevent low-income people from buying homes. Where is this noble creature? And why didn't Barack Obama push for him at the time?

Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock. If Democratic policy is so good at protecting the little guy from asset price bubbles, how come the stock market crashed in 2000?

Too much "lottery mentality" in housing from purchasers AND mortgage brokers.

Too much demand for "high returns" from cash-heavy munis, school districts, ....

Walt Kelly was right: "We have seen the enemy, and the enemy is us."

1 comment:

Anonymous said...

I'm sure the boys and girls at AIG, Merrill and Lehman were surprised to be told "sorry we're (the Fed window) closed.

Maybe they should go to ACORN.