Wednesday, March 3, 2010

What Part About the Failure of Regulation Don't You Get?

Here, Harold Meyerson writes in the Washington Post about the need for more regulation of the banking industry. Just amazing.

There is no industry more regulated than the banking industry and the financial services industry. How can it escape the attention of people like Meyerson that government regulation just does not work? I've argued here that we should put all the regulators in jail, along with Madoff.

Regulation does not work because it cannot work. I've previously explained why here. Regulators are only people. Worse yet, they are people who don't have strong incentives to avoid the astonishing errors that lead to the financial debacle that led to the recent recession. People who do not understand the role that regulators played in the subprime mortgage meltdown and the credit default swap circus really need to take a step back and ask some rather obvious questions. Read this for a clear explanation of the point I'm making.

The Fed knew all about the subprime mortgage arena. The Fed and other bank regulators knew all about credit default swaps. Regulators knew all about off-book financial vehicles and obfuscation of sovereign lending. To say the regulators did not know just further damns regulators and makes my case in point.

It is not more regulation of industry that is needed. Just the opposite. We do not need regulation; we need only laws that punish deceit and fraud. Read here about the differences between laws and regulation

If the banking industry knew for certain that its bad deals, shaky derivatives, and miserable loans would not be covered by the Fed and the U.S. Treasury (via tax payers and additional federal debt), the banking industry would abstain from those very deals, shaky derivatives, and miserable loans. When is the last time you touched a red-hot stove-top burner? Why don't you? People who run banks and shadow banks are just like you. They won't touch a red-hot burner either, unless they don't have to feel the heat.

Thanks to the Fed, we have a banking industry that does not have to feel the heat. Meyerson evidently wants more of the same. I repeat, just amazing. Here's an idea; give it a read.

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