Don’t just blame deregulation

Sebastian Mallaby, writing in “The Washington Post,” argues that, contrary to much of the rhetoric, deregulation was not to blame for the financial meltdown. Excerpt:

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.

If that doesn’t convince you that deregulation is the wrong scapegoat, consider this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris calculates that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers. There’s a vigorous argument about whether Calomiris’s number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.

So blaming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis.

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  • FW

    no. this is all wrong.

    the choice between “regulation” and “deregulation” is a false and manipulative and misleading one. Like we are deciding here between socialist interventionism and free market capitalism.


    We are talking about the proper application of the Rule of Law to economic activities.

    Go back and check out adam smith, the ubercapitalist, on this issue. as a christian, he was in no way in favor of unregulated markets in the way you and this article are framing things. the frame is wrong dr vieth!

    as with most public issues, conservative politicians seek to divide us with a a sloganism (is that a word?) that presents a false either/or choice that locks us into a narrow frame of reference that is misdirective.

    again the choice is not between regulation or deregulation. and that does not equal free market capitalism vs regulatory socialism.

    The argument needs to be framed differently.

    check out the adam smith institute´s website for a more helpful and nuanced discussion.

  • FW


    consumers thinking that it was ok to buy a home they could not afford with a no down, interest only scheme and a 5 year baloon. but most of those were unsophisticated (yet still knew that they were taking a risk…) . and the government can´t really control individuals like that. it can only work to make things more transparent. less 8pt type on contracts, simpler explanations that dont focus the consumer solely on the amount of the monthly payments…

    here is the deal. the morality of my buying a house i know I can´t really afford is pretty obvious. I can´t easily make my sin here look like a virtue

    the really problem is bankers and others who have masked their covetousness and greed and immorality with free market slogans.

    Luther warned about this in his commentary on corinthians. he points out that where paul talks about sexual sinning and greed, greed is by far the more dangerous and cunning sin. why? because sexual sins can usually be easily called out as sin.

    greed and covetousness can easily be masked as virtuous hard work, thriftiness, personal responsibily, etc. Luther says it is exceedingly hard to preach sermons in this area to call out these sins.

    Luther was prescient wasn´t he?

  • FW

    here is another take on adam smith…

    is there anyone here besides me, who has a dogeared copy of “wealth of nations” by adam smith. Read him. Please. He IS a capitalist who believed in unfettered markets.true. but he also balanced and limited that concept against other ideals. As this article points out. he can be used to both support AND oppose the idea of a minimum wage. He is very nuanced. Often his ideas are ripped out of context ignoring his many caveats….

  • Anon

    Indeed. Obama keeps harping on McCain taking pride in deregulation, hoping that the American people will not discover his lie. Obama and his cohorts insisted on not allowing McCain’s regulations which would have prevented the present economic crash. McCain is talking about -other- regulations when it comes to deregulation. It matters very much -which- regulations, doesn’t fw, just as you say.

  • CRB

    Interesting, insightful interview of Bill George here:

  • FW

    #5 crb

    great link! thanks for sharing.

    the real continuing breakdown is a crisis of trust. it is that simple. and without trust restored, we WILL have another great depression.

    banks after all NEVER have ALL deposits on hand. they reinvest the money consumers and business deposit. any bank run then , will effectively close ANY bank.


    I hope that the us government spends that bailout money in a way that incentivises best practices.

    I hope that they ONLY buy debt that is backed by tangible asset that can be appraised in a meaningful way. stuff like real estate and factories.

    that 700 billion need to be invested not spent. what is bought needs to be credit worthy (backed by something tangible that can be repossessed, also known as colateral), even if the value is currently depressed. I don´t think stock ownership in an investment institution qualifies here.

    for this reason, McCain´s idea of buying out all the home mortgages is a worthy idea. there is REAL value there.

    secondarily, i worked for many years at corporate turn arounds. the way we were successful was to work backwards through the transaction cycle of a business. start with collections (where we would hear about all the problems from customers) and work backwards through receivables, inventory, purchasing, sales and then finally the executive offices….

    McCain´s best moment for me during the last debate was this simple proposal. It resonates with everything I know, on a smaller scale, about fixing chaotic business transactional “food chains.”

    I hope that that 700 billion is first directed there.

    this will not be as easy as it sounds. most mortgages were agregated and sold as a package several times over. This is such a mess that foreclosure courts, that by law are required to see clear claim to title from the creditors have been illegally waiving this requirement in many foreclosures because it is unclear who actually owns the debt.

    Starting with buying out these mortgages then would be the fastest way to sort out real value from what has been created out of thin air by creative financiers.

    after that, the next thorny issue would be how to value those mortgages. I would say that banks should be cashed out at the current market value of the underlying assets. this would put banks at parity with the situation of the homeowners who are increasingly upside down on their loans. homeowners should NOT have their loan amount reduced, but rather have their mortgages changed to a variable rate based on tbill yields which will tie their fortunes to that of the government debt that is bailing them out. those homeowners who bought speculating that the market would continue to appreciate will lose their homes. they should. and the govt will use the proceeds of those sales to pay down the national debt.

    i disagree so far with obamas idea to allow homeowners to include their mortgages in bankruptcy proceedings as something to be adjusted. This would not be just.

    buying paper that is worthless will ultimately do nothing to restore trust.

    The dollars you sweat and work for are worthless paper apart from the rather blind trust that there is value there.

    You don´t really have value for that paper money until you are able to convert that paper money to something real. like real estate, a car, etc etc.

    we often get driven away from the fundamentals by group psychosis.

    consider simple facts.

  • CRB

    Well, I think that according to Scripture, we are to trust God and not man. So, by the grace of God in Christ Jesus I will trust Him, pray and hope for His return soon!