Risks to Rise Exponentially

by Don Boudreaux on March 17, 2009

in Regulation

In today's Wall Street Journal, Peter Wallison nicely dissects a truly frightful proposal of a man who is, quite Frankly, a hypocrite of first rank.  Here are Wallison's opening paragraphs:

After their experience with Fannie Mae and Freddie Mac, you'd think
that Congress would no longer be interested in creating companies seen
by the market as backed by the government. Yet that is exactly what the
relevant congressional committees — the Senate Banking Committee and
the House Financial Services Committee — are now considering.

In the wake of the financial crisis, the idea rapidly gaining
strength in Washington is to create a systemic risk regulator. The
principal sponsor of the plan is Barney Frank, the chair of the House
Financial Services Committee. A recent report by the Group of Thirty (a
private sector organization of financial regulation specialists),
written by a subcommittee headed by Paul Volcker, also endorsed the
idea, as has the U.S. Chamber of Commerce and the Securities Industry
Financial Markets Association.

Anyone who imagines, even for a split second, that this sort of regulation is a good idea is hopelessly delusional.

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The Other Eric March 17, 2009 at 12:05 pm

Look for what is not here:

From the corporate news site Business Insurance: "(Congressional) Panel members said that the systemic risk regulator should work with other federal regulators, such as those overseeing banking and financial institutions. The regulators should cooperate to identify problems at a holding company before it triggers the type of domino effect that started with U.S. mortgage lenders Fannie Mae and Freddie Mac and is now threatening the survival of American International Group Inc."


(Bloomberg) — U.S. Representative Paul Kanjorski said Congress should consider creating a systemic-risk regulator to keep individual companies from threatening the financial system after last year’s collapses of Lehman Brothers Holdings Inc. and Bear Stearns Cos. roiled markets.

Lawmakers must determine whether to start a new agency or give authority to existing regulators as they move to keep firms from becoming “too important to fail,” Kanjorski said today at a House Financial Services subcommittee hearing … “Because our current regulatory regime has failed, we must now design a robust, effective supervisory system for the future,” said Kanjorski, a Pennsylvania Democrat who leads the capital markets panel that called the hearing.

These people really do want a 1970s-style Soviet state where every major economic initiative is 'reviewed' and 'supervised.' Oversight is called for before future calamities which, by their very nature, are buried in complex situations. Philip K. Dick would be proud, pre-crime has indeed arrived.

Don, please tell Russ not to eat the slice of pizza he will want next Thursday. It contains ingredients that will precipitate a cell-level reaction that will lead to tissue growth that erupts in a tumor 11.4 years from next week. (I used fancy numbers and everything– Where do I sign up for this job?)

Methinks March 17, 2009 at 12:36 pm

Of course they want a soviet-style state. That's the outcome that most benefits politicians. Unfortunately, the Nomenklatura's life was a lot less glamorous than most people realize because they lived in fear of not knowing which ass to kiss to remain in the good graces of the party and not knowing carried very severe consequences, but that's a matter for another time.

The best part was the last paragraph in the Op-ed. This will kill competition and increase costs. Two things related to competition are not mentioned. The first is that the regulator will be captured by the regulated and any competition will be regulated out of existence. The level of regulation we have now already achieves this and more regulation will cut out more competition, decreasing choice and increasing costs. The second is that this will also make American financial institutions less flexible and less competitive internationally over time.

Fabio Franco March 17, 2009 at 12:41 pm

In Venezuela, Chavez decided that, since the evil entrepreneurs were raising the price of chickens, the state would go into the … fertile egg business. National “food security” would thus be established.

The US, under Obama, is venezualizing itself. Soon all will be meekly waiting for their daily rations from the US Department of Omelets.

Charlie March 17, 2009 at 2:01 pm

So rather than have someone regulate entities that the government considers too big to fail to keep it from taking on large risks, the author wants the gov't just to keep quiet about it? He thinks the market won't figure it out?

Either figure out a way to prevent ex post bailouts or regulate ex ante, ex post bailouts and no regulation is the worst of both worlds. And I've yet to see a proposal to prevent ex post bailouts that didn't suffer from time-inconsistency.

Methinks March 17, 2009 at 5:57 pm

Charlie, the article points out that there is no way to tell where the risks are. If you think government is better at figuring it out, then you haven't been paying attention to what happened with the GSE's and you've never met a government regulator.

The best regulation has ever been able to do is to lull the vast majority of the population into the false belief that all is well because regulation will prevent bad outcomes while the regulated industry captures the regulator. At worst, it chokes off competition and innovation as this is happening.

You assume that regulation will prevent catastrophe which obviates the need for bailouts. This is a mistake. Regulating ex ante won't prevent ex post bailouts. A growing government will only ensure more ex post bailouts. The worst problems occurred in the most regulated segments of the economy and that's true of both government happy countries and the supposedly "free market" USA.

LoneSnark March 18, 2009 at 12:10 pm

So, it seems to me a better solution to the current problems would be find a way to modify the bankruptcy laws to allow large institutions to unwind without wrecking otherwise sound institutions. Now, the FDIC does this by throwing in its own money. Is there another way?

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