Posts Tagged ‘deregulation’

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Deregulation Argument is Nonsense

October 6, 2008

Liberals have been arguing that the root of the financial crisis is the repeal of the Glass-Steagall Act of 1933 by the passage of the Gramm-Leach-Bliley Act which they allege led to masssive deregulation which they say caused the mortgage crisis. We, on the other hand track this mess back to the Carter Administration and the Community Reinvestment Act which forced lending institutions to lend “equitably” to those in their communities. The lending standards were lowered during the Clinton administration. Sebastian Mallaby writes in WaPo 

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University‘s Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn’t been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

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WSJ: Bill Educates Barack

October 1, 2008

From today’s WSJ:

A running cliché of the political left and the press corps these days is that our current financial problems all flow from Congress’s 1999 decision to repeal the Glass-Steagall Act of 1933 that separated commercial and investment banking. Barack Obama has been selling this line every day. Bill Clinton signed that “deregulation” bill into law, and he knows better.

In BusinessWeek.com, Maria Bartiromo reports that she asked the former President last week whether he regretted signing that legislation. Mr. Clinton’s reply: “No, because it wasn’t a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter.

“But I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”

One of the writers of that legislation was then-Senator Phil Gramm, who is now advising John McCain, and who Mr. Obama described last week as “the architect in the United States Senate of the deregulatory steps that helped cause this mess.” Ms. Bartiromo asked Mr. Clinton if he felt Mr. Gramm had sold him “a bill of goods”?

Mr. Clinton: “Not on this bill I don’t think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can’t possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence.

“But I can’t blame [the Republicans]. This wasn’t something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.”

We agree that Mr. Clinton isn’t wrong about everything. The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, including 38 Democrats and such notable Obama supporters as Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle — oh, and Joe Biden. Mr. Schumer was especially fulsome in his endorsement.

As for the sins of “deregulation” more broadly, this is a political fairy tale. The least regulated of our financial institutions — hedge funds — have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren’t diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

Meanwhile, commercial banks that had heavier capital requirements were struggling to compete with the Wall Street giants throughout the 1990s. Some of the deposit-taking banks that were allowed to diversify after 1999, such as J.P. Morgan and Bank of America, are now in a stronger position to withstand the current turmoil. They have been able to help stabilize the financial system through acquisitions of Bear Stearns, Washington Mutual, Merrill Lynch and Countrywide Financial.

Mr. Obama’s “deregulation” trope may be good politics, but it’s bad history and is dangerous if he really believes it. The U.S. is going to need a stable, innovative financial system after this panic ends, and we won’t get that if Mr. Obama and his media chorus think the answer is to return to Depression-era rules amid global financial competition. Perhaps the Senator should ask the former President for a briefing.

Liberal friends of mine point to “deregulation” and the GLB as th reason for our financial crisis.  The article makes a great point about the lack of regulation in hedge funds and the success they have had.

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Freddoso Interviews Cantor

September 30, 2008

David Freddoso interviews Eric Cantor at National Review:

Barney Frank, Barack Obama, and other Democrats have suggested that this problem resulted from a philosophy of deregulation. Is that explanation fair, or what’s really at the heart of this?

A basic explanation of how we are where we are is the devalued state of the real estate market. We’ve had monetary policies that have allowed free credit to flow. We’ve had oversight regulators that have not done an adequate job in certain instances. But let’s see where we first started going off course. That was during the Carter administration, when Congress began this process of pushing lending institutions into extending credit to uncreditworthy borrowers. 

This is the Community Reinvestment Act that you’re talking about?

Yes. And in fact, as the regulations developed, banks would be punished if they couldn’t demonstrate a certain number of loans on their books that were extended to those who were not worthy of that type of credit. It started a very bad trend. And then we had Fannie and Freddie, who continued this cycle and really ramped up that kind of lending in an exponential way with a very ineffective oversight regime, a fault of both Congress and the administration.

If there were one or two changes you could make to get more Republicans on board, what would you do in order to have the bill pass in an improved version?

First of all, an insurance program that would apply to certain classes of assets would help reduce the amount of money flowing out of the Treasury. Also, I think if you put in language about the mark-to-market rule — repealing that instead of just asking for a study about it. There’s not unanimity, but there’s a growing consensus about the impact of the implementation of that rule by the regulators as well as the accounting firms. 

I also think that folks are very concerned about the short-selling situation at the FEC. We absolutely have to reinstate the uptick rule, and from what I’m told there’s runaway naked short-selling (the short-selling of stocks one does not actually possess) that tends to imperil the market. We need much stricter enforcement on the naked short-selling.