There is a portion of the criticism of the latest financial debacle that goes like this:
it sounded too good to be true, so of course it was; anything that does is bound to fail
the latest real estate/CDO bubble was just like every other bubble (dotcom, tulips, etc.): people thought that the “world had changed,” and that their new financial system, etc., would be able to break through the old restrictions, keep growing forever, etc
The upshot of this type of criticism could be perhaps boiled down to:
The financial world is the same as it ever was. Don’t try to think up new ways to game the system; they will always fail. Stick to the boring stuff that we know works.
Is this the case?
I think the thing that’s hard for people to get their heads around is that there is always innovation in every other sector of society: technology, communications, biology, physics, etc. Why not in investing, too?
Plus, there HAVE been innovations that have turned out to be winners: banks, the corporation, stocks, bonds, mutual funds/401ks, etc. But have we now reached the limit? Could there really be NO new stable investment vehicles to be found?
Should we put a moratorium on the development of new financial instruments altogether, so as to avoid the type of fallout we are now experiencing?
I think what is going to happen is that they will be delayed until examined and regulated, if necessary. This will help cast some eyes on them that aren’t attached to people expecting a big payoff when they get introduced. So credit default swaps, for instance, might be considered just fine, but the regulators will ask where the reserves are in case the bonds go under. This will no doubt reduce the immediate profitability of the innovations, and we’ll hear screams about competitiveness, but it should make for a safer system in the long run.
No, I don’t think financial innovation should be stifled. Credit derivatives, to use Voyager’s example, can actually be a great hedging device, with proper regulation and oversight.
Futures contracts, options, swaps – when used to actually hedge risks are great tools. When used to place outrageous, unhedged bets that cause systemic meltdown, not so much. The financial world is NOT the same as it ever was – options markets really opened up about 30 or 40 years ago, MBS maybe 20 or 30 years ago, and the beat goes on.
Thing is, those innovations turn out a lot better when kept under control by regulations. Properly written safety regulations, environmental regulations, financial regulations, and so on allow for innovation while minimizing destructive and predatory behavior. In fact, they can drive innovation by pushing people away from destructive & predatory behavior that happens to be profitable, towards new ideas that could never compete in an “anything goes and screw the consequences” environment.
This gets my vote. Just because you develop a bitchin’ new flamethrower even a 10 year old could use doesn’t mean you’ll be allowed to sell it without restriction becuse the harm to society far outweighs the good. And that great new communications devicve that allows you to hear all the neighbors phone conversations and even make calls on their lines so you don’t have a phone bill of your own? The FCC’s gonna want to have a chat with you about that too.
Except that the people writing the regulations are no smarter than you. And your regulations are as likely to hurt as to help, but you don’t care. There are “regulations”, and whether the work or not ir make things worse, it doesn’t matter. If it’s broke, the answer is “more regulations”. If it has effects you don’t like, the answer is “more regulations”. If you simply don’t admire it… “more regulations”.
The blind cannot lead those with at least one eye.
Regulations are not a matter of being smart. Regulations are written to maximize the long term good of the entire society, not the short term good of a company, which it is the duty of a CEO to do. Why would a company not take greater risks for greater returns, and why would they not keep doing it until the risks became so great, at least for some companies, that they go under, taking lots of others with them. Why not regulate companies who will have to be bailed out?
The banks who are regulated, the thrifts, are not failing in large numbers, and the few who are are getting nationalized by the FDIC, cleaned up, and sold, just as is supposed to happen. You don’t hear much about it because the regulation works. The causes of the crisis - mortgage brokers writing crappy loans, credit default swaps, are unregulated. Why would more deregulation help?
And to cut off an answer in advance: CRA was not responsible for the crisis. It does not require anyone to make bad loans, and the worst offenders among the mortgage brokers were not covered by it.
No, I do care; it’s just that I simply don’t believe that they ARE “as likely to hurt as help”; rather the opposite. I know it’s an amazing thought, but there are people who actually disagree with you. We aren’t just faking it.
No, you can’t say that, because that would mean that the crisis wasn’t Jimmy Carter’s fault, and it was, because he was a Democrat. It was either him, or Clinton, or FDR who’s to blame. Thus sayeth the official talking points.
I know you disagree with me. That’s where you started to go wrong. “Your side”, if you care to put it that way, still doesn’t have any answers. You don’t even have the question. Your only solution is to call for “more regulation!”, but you don’t know what it ought to be. It’s just more empty, meaningless noise.
I don’t support the bailouts. I think “your side” were fools to start them. Let the weak die. Let them burn. You’ve gotten into the habit of being more conservative than the Conservatives. Fear forces you to push and poke things into never changing, because you’re afraid of the consequences. You want to control everything, and you don’t know how.
You think you know what the long-term good of society is? A lot of people don’t agree, and probably nobody knew how to regulate credit-default swaps, and probably nobody does today, either. So you cover for your ignorance by claiming it was a Republican’s fault, or ignore that issue and say Republicans are claiming it was a Democrat’s fault. And some may be, but that’s not the issue. The issue here is ending the problem, and you won’t do what’s neccessary for that.
Don’t forget Rep. Frank. While he was minority chair of a committee, clearly he had all the power and could destroy the president’s desperate attempt at regulation. You might know him under his Sith name as Darth Barney.
We HAD regulations that worked for a long time, set in place after the Great Depression; the Republicans gutted them, and now we have Great Depression Mark II.
And watch the resulting disaster. I suppose you think we should eliminate welfare and machine gun the poor when the food riots start, too.
Because being a conservative isn’t about being conservative. It’s about greed, and malice, and ramming your religion down people’s throats, and bigotry, and fascism. The conservative wing isn’t trying to conserve anything; they are trying to radically change the country, and the world.
Let me toss out a thought that may help people view the issue differently.
In technology, communications, biology, and physics, innovation leads to new possibilities. Considered long-term (say the last two centuries) it’s obvious that every generation brings new technologies, new ways to communicate, new discoveries in science and so forth.
But in the financial world, the exact opposite is true. Every generation brings new regulations. Starting with a state that was almost completely unregulated, we first started imposing tariffs, then sales taxes, then income taxes, then the Federal Reserve was created, the banks were regulated and the FDIC created, then the SEC created to regulate stock markets, and so forth. History suggests that more regulation is needed to keep wealth growing.
As for the charge that we don’t know what regulation to impose, here’s a list based on common sense:
New powers for the SEC to inspect financial instruments and verify that they actually contain what the banks say they contain.
Fixed limits on interest rates that can be charged by payday lending companies.
Requires honesty and transparency from banks when advertising their loans.
Have all lobbyists for financial firms deported to Tierra del Fuego, or at least limit their access to Congress.
That’s not much of a response to my point about why we need regulation. Do you dispute that CEOs will do what they see as good for their company? Do you dispute that this often works in the short term and not in the long term? Do you dispute that these actions can harm the financial markets as a whole (as well as society?) If you do, please explain. If not, then please explain a better solution than regulation - which should allow maximum freedom of action while limiting or preventing damage. The details of regulations may not be simple, but plenty of them have worked rather well over the past century.
We saw some of the consequences when Lehman went under. How much economic damage and unemployment would you accept to satisfy your ideological hatred of bailouts? My side seems to include most of the economists of the world. Bailouts are not a good thing, but they are a necessary thing. The details of the bailouts, how many constraints to place on the bailees, is a matter of dispute, indeed. Anyone can natter on about them, in the press or even in Congress, but anyone with actual responsibility seems to conclude that they are needed, and I include Bush here as someone showing a sense of responsibility.
Credit default swaps are insurance. Insurance gets regulated all over, and very successfully too. You have reserves for losses. You don’t let me take out insurance on the house of my neighbor.
I have no idea which party the bankers belonged to. The fault can be assigned not to a party,. but to a philosophy, that devoutly worships the so-called free market, and refuses to recognize the perils that it brings. Clinton screwed up by signing the repeal of the New Deal regulations that kept the markets sound for decades. That’s pragmatism, and that’s what I believe in.
You can’t effectively regulate something you don’t understand. Does this mean you shouldn’t do anything you don’t understand? Well, no-- it just means that perhaps you should try it with more humility. In practical terms, the most basic regulation should be: don’t let everyone try this at home all at once, not until we figure out what the downsides are.
Financial innovation is fantastic, wonderful, essential. Needless regulation-- whether one bad regulation or a thousand good regulations that are bad in quantity-- should be avoided. Hell, it must be avoided in order for the markets to work. No risk = no money, so there will always be risk. It’s in the definition, folks.
Your response is self-contradictory. How do you keep things reined in until we figure out the downsides without regulation?
In the small, doing things you don’t understand is fine. That’s why new processes are tried out in the lab, behind guards that protect the experimenter if things blow up. You don’t introduce it to mass production until you damn well understand it. If a new financial instrument is so poorly understood that its inventors can’t explain it to the SEC, should the really be selling billions of dollars worth of it?
Much of the regulation we’re talking about here involves understanding risk and putting away reserves in case the no-fail investment goes tits up. That definitely means that you can’t sell as many of them and make more money. Is that a bad thing?
What lack of regulation does is to socialize losses. A mortgage broker, knowing he can dump a subprime without documentation on the open market at high interest rates doesn’t give a crap about affordability - in fact he makes more money if he ignores it. Was that a good idea?