Over at The Big Picture former federal bank regulator Bill Black launches into an extensive critique of opposition to bank regulation, which he characterizes as “the dangerous myth that financial regulation is unrelated to financial crime”, I’d like to commend to your attention. If I can summarize a 1,000 word essay in a simple sentence, I’d say he blames the financial crisis on financial crime and financial crime on a failure of regulation under the Clinton, Bush, and Obama Administrations, which have adopted a common philosophy which might be called “Rubinism”, i.e. regulation of, by, and for the big banks.
I honestly don’t think he goes far enough. I think the fundamental problem is one of regulators’ incentives. As I see it there are two contrasting strategies for fixing that. Either you can make the big banks much less tempting (by making them smaller) or you can alter the relationship between regulators and the banks they’re supposed to be regulating by making it possible for an aggressive young regulator or prosecutor to make a lot of dough by going after financial crime rather than “going native” and taking a light hand with those institutions in the hope of landing a lucrative sinecure later on.
Have you ever watched the withering invective heaped upon bank regulators in Congressional hearings by Barney Frank et al and captured on CSPAN tapes?
Nuff said. I’d give Barney the finger, walk out, and resign immediately.
Couldn’t get too far in the piece. Early we have an associate professor of economics and law and former litigation director, criticizing his opponent as an attorney. (!?!)
The attorney-politician has no doubt a deceptive way of simplifying all choices into four alternatives, but the former litigation director interprets her positions with typical legal tactics as erecting strawmen and exaggerating the opponent’s position to refute it. No time to finish it.
I certainly disagree with the claim that S&L deregulation created looting, as opposed to the failure of S&Ls created looting.
“I certainly disagree with the claim that S&L deregulation created looting”
Because? At any rate, Black has noted that regulators caught on to what was happening in the S&L crisis, but the politicians in charge kept them (for awhile) from going after those involved. I think the financial incentives are important, but the tone set by those in charge, always the political leaders, is also important.
Steve
. . . because I’ve read the post-bailout analysis from the FDIC/RTC, and read regular case summaries while doing work for them. The classic criminal fraud was an S&L failing, followed by officers advancing loans to closely related entities or individuals while bypassing internal controls. For example, an S&L that is close to failing and an executive loans money to his cousin’s while elephant, violating his fiduciary duty to the business, and evidencing self-benefit.
The S&L’s were failing because of the interaction of the regulatory constraints in a high-interest environment. They weren’t “deregulated,” their regulations were lessened, which didn’t help and maybe hurt. I think the causal chain is all wrong.
Because it isn’t just deregulation that can lead to looting…it is deregulation along with a government that will bail out looted entities that creates the perverse incentives. If you look at some of the more notable instances of looting you see that the big money guys behind the looted entity end up coming out either with their entire investment or maybe a bit more. Why give any close scrutiny to the situation if you are a big money guy and there is always this issue of too big to fail?
If you are going to put money into anything that is deemed to big to fail you don’t have to worry. Since it is too big to fail, it wont be allowed to fail so your initial investment is safe. If it doesn’t fail, then you make money. No down side. It isn’t just the lax nature of regulations, but that various policy makers and politicians wont be willing to let the too big to fail concern fail.
I’d also suggest there might be a positive feedback loop between bailing out entities that are to big to fail and the growth of entities that are too big to fail. That is, bailouts will create an incentive to become too big to fail. Make sure that whatever it is you are doing is so large that failure will scare the bajeebers out of the politicians/policy makers so that they will feel compelled to act.
Add on that many policy makers and politicians often toddle off to Wall Street and other large corporations when their stint in whatever office/agency is done and you have really made a hash out of things. And that politicians can benefit financially from laws that they pass….is it any wonder our system is so screwed up?
And once you start down the road of bailouts it gets harder and harder to stop. Sorry steve, but since you advocated bailouts in the past, in your own small way…you are part of the problem.