Conservative Harvard economist N. Gregory Mankiw writes in the NYT today, In Financial Regulation, Recognize Our Limitations.
"One thing we cannot do very well is forecast the economy. The recent crisis and recession caught most economists flat-footed. This is nothing new. We have never been good at foretelling the future, but when the news is favorable, others forgive our lack of prescience...Another thing we cannot do very well is regulate financial institutions."
Except I don't buy it. Yes there was a housing bubble but the problem was that the big financial institutions had so much money in derivatives based on real estate prices that when they collapsed the banks did too. The problem wasn't that we couldn't regulate banks well, it was that Congress in the 90s deliberately choose not to regulate derivates at all. It's not that they couldn't do it well, it's that based on that assumption, they were instructed to not even attempt to regulate. And as I've said over and over, it's not even the kind of regulation saying they shouldn't be able to do that, it's the kind of regulation that said they needed to report what they were doing with derivates. All free marketers have to realize that a free market only works with actual knowledge of the market available. Without any reporting regulations, there was no knowledge.
Why is this is hard to grasp? Clearly a Harvard economics professor should know this. Am I mistaken on this point?
1 comment:
Regulators from the FEDERAL RESERVE and the SECURITIES and EXCHANGE COMMISSION were embedded at Lehman Brothers; they did not see the ongoing accounting fraud at that firm, even with an office in the building INSIDE THE BUSINESS.
I think Secretary Geithner needs to explain how and why this happened under his watch. How is he still Secretary of the Treasury?
But what does the Lehman accounting disclosure truly reveal about the nature of financial regulation and regulators?
It tells us that clearly regulations and regulators alone are insufficient to prevent these types of economic crimes and disasters. In the simple Wall Street equation of risk vs benefit, the people who stood to personally make tens to hundreds of millions of dollars in the short term, sold out the long-term interests of the US economy, their shareholders, and their co-workers, for their own selfish greedy desires. They walked away with a trillion dollars, and we got the clean-up bill.
It is only when the full weight of the Justice Department is unleashed upon the people who stole a trilion dollars out of our collective wallets, and almost caused the collapse of the US economy, will there be any hesitation for Wall Street Bankers in the future not to take such outrageous risks with other people's money.
In as much only when these financial control frauds (see Theory of Control Fraud by Professor William Black) are fully prosecuted including clawbacks available under the RICO statute, will future Bankers hesitate because from the very real and very rational fear that ALL of their Ill-gotten gains will be taken away from them and (probably more importantly) their family, combined with the realization that they will spend many many years in a real prison, will they hesitate before creating new weapons of mass financial destruction to unleash upon the rest of us.
Until that happens, nothing changes because the smartest guys in the room, the creative financial genuises of Wall Street, will always be able to figure out how to legally, semi-legally, or illegally circumvent (or remove) any regulations or regulators in place in order to maximize their personal gain.
That is unless the penalty for doing so is so severe that they just won't do it in the first place.
The risk/benefit equation must rewritten!
When the stakes are this high the only deterent to keep the Banksters from doing the same thing again is mutually assured destruction. If you bring us down, we will bring you down.
We need to stop blaming the cops and start blaming (and arresting) the criminals. Then we can go back and arrest the crooked cops, and fire the merely incompetent ones.
TT
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