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Touche, Sir.

With several European states, including Iceland and Germany frantically shoring up their own financial sectors, Ronald Bailey wonders if the great “de-regulation boogeyman” is really to blame for the current economic woes after all:

Who knew that Europe, of all places, was so under-regulated? Or maybe de-regulation is not the chief cause for the outbreak of financial chaos? Just wondering. 

Good point.

  1. Timothy says:

    Oh hell, I’m only a pretend economist and can hardly be called a “professional” but, given the way Rodrik breaks it down, I lean more toward the first-best viewpoint, probably, but I also kind of don’t like the binary. I think the model is useful, though. And why does nobody give the Second Fundamental Theorem of Welfare Economics any love? I do think that any economist worth reading realizes that we live in the world of second best, and what Rodrik’s model is looking at is whether or not the economist in question sees the same second best issues with government that they see with markets.

    A lot of more liberal economists are really good at seeing market problems (although they do tend to throw out non-technical cries of market failure when they see outcomes they don’t like), but not so great at seeing the same agency and incentive issues when the government is involved. It’s almost like it has special government magic that makes it good at everything. On the other hand a lot of more libertarian or conservative economists are good at seeing government failure but not good at seeing market imperfection. Pick your poison, I guess. I’ll take a little market imperfection, because at least the motivations of the actors are easy to predict.

    Not knowing what assets are worth has about nothing to do with who owns them, it’s a fundamental difference between bid/ask and at the moment that’s causing havoc due to mark-to-market rules…now the wisdom of suspending those rules is also an open discussion (I, unlike Megan McArdle, am not prone to the vapors over suspending rules that are only a few years old in the first place and we functioned just fine without for a long time).

    Transparency can be a key issue, and can be addressed with things like SEC reporting requirements (which I generally favor). The thing about regulating who can own what kinds of securities is that you have to do it by exclusion – “You may not own X” or by rating…well, the problem with that is there are all kinds of arcane securities, and brokers are very very smart…so they come up with even more arcane securities and find ways to get them rated highly despite the high risk and return. This is especially true of all kinds of weird derivatives that almost nobody understands. Rule making drives that behavior, and the second order effects are difficult to predict. So I’ll take the predictable first-order effects of greed.

  2. Chris says:

    I stumbled across this in my search…and I am curious about you. Would you fall into the first-best category of economists in Rodrik’s model? If so, then I can see some of our disagreements being hard to reconcile. I’m still looking of course, but thought I’d throw this in for now because it’s interesting…especially coming from a guy like Rodrik.

  3. Chris says:

    As I’ve said, I’m not talking about this as an expert. So, in order to try and meet you at the level you prefer to discuss this, I’ll get to reading and get back to you.

    I am still not saying that the repeal of G-S caused any of this. My point is that the reason behind it ever being put in place originally, outside scrutiny, is part of the problem here. These failed institutions have failed miserably at regulating themselves. Putting something like G-S back in place wouldn’t solve it either. I’m not, nor have I ever argued that it is the cure-all and the source of all of these problems we’re facing. However, something similar to G-S could help and, arguably, could’ve helped by increasing transparency, etc. At this point, we have no idea what things are worth, we just spent 840 billion to fix the problem for a month or two and even that has only managed to work for 2 days. So, we’re basically back at the drawing board.

    Anyway, I’ll stop writing my thoughts and find some thoughts of others to shower you with. hehe

    Cheers and thanks for the links.

  4. Timothy says:

    You seem to hate my argument that Glass-Steagall had anything to do with this, but I have a hard time seeing how there is no impact from its repeal in our current situation.

    I hate it because it is, let me put this plainly, completely fucking ridiculous. Let’s examine the literature, shall we:

    Given a history like this people wonder how repealing the law could have been a good thing. But a significant academic literature has investigated these claims and rejected them. Eugene White, for example, found that national banks with security affiliates were much less likely to fail than banks without affiliates. Randall Kroszner (now at the Fed.) and Raghuram Rajan found that (jstor) securities issued by unified banks were (ex-post) of higher quality that those issued by investment banks. A powerful book by George Benston went through the entire Pecora hearings which supposedly revealed the problems with unified banking and found them to be a complete sham. My colleague, Carlos Ramirez later showed that the separation of commercial and investment banking increased the cost of external finance (jstor). Finally, my own work (pdf) unearthed the real reasons for the separation in a titanic battle between the Morgans and Rockefellers.

    That’s from Alex Tabarrok at GMU. I know you’re a prof, you probably have JSTOR access, worth a read.

    Think about who has failed – Investment banks and some over exposed commercial banks. And who is riding out the storm? Integrated banks like JP Morgan Chase, BofA, and Citigroup.

    Government CAN act rationally

  5. Chris says:

    Sorry for the jumbling in that 4th graf.

  6. Chris says:

    No, I don’t think that it is to blame…I think that the snowball started rolling at that point. Subsequent years did nothing to stop it’s movement. Buying companies for pennies on the dollar may be “rescuing”, but it isn’t exactly pretty to look at…especially in investment portfolios I imagine.

    I agree with your entire last paragraph, but I also agree that one thing that makes the whole nation-state system thing work is government. People who hate paying taxes, hate society. People who hate government, would likely cringe the first time they needed the services typically provided by government. Congress is far from an ideal institution in its ability to act in the interests of the average American, but therein lies my argument for a positive impact from ‘government’. That is, it doesn’t have to be giant swings in one direction or another. Government CAN act rationally…if ‘we’ wanted it to…or in this country (theoretically) if we demanded that it do so. That may be pie in the sky, but I have more belief in the ability of government to act in my interest than I do in Phillip Morris.

    You seem to hate my argument that Glass-Steagall had anything to do with this, but I have a hard time seeing how there is no impact from its repeal in our current situation.

    Do you think we would still be here if it was still in place and banks and brokerages were not mandated to be separate actors in the economy? Would preventing this merging and the ability to underwrite securities not have any effect? It seems to me that the looking at the reasons it was put in place originally, the current situation seems awfully similar to then. I’m not saying it is a cure-all for this, but it would DEFINITELY help isolate the damage and identify things in a picture that is still VERY murky post-bail out.

    Of course, it all goes back to my original criticisms of business being the epitome of human self-interest. If you have people OUTSIDE of your company watching what you do and asking the right questions to keep your business practices in line…chances are you are going to be kept, mostly anyway, in line. However, if you merge it all into one room, in one company and no one is asking questions…well, you convince yourself you are invincible, you push for more and more and more and more money…and then you fuck the entire country.

    Hell, you get uncomfortably close to fucking the entire global economy. At the very least, the US now has 10 Trillion in debt+ and another Trillion was just doled out to plug holes in a dam where we can’t even see the holes yet. Paulson and his crew are standing by with wads of cash waiting to get wet.

    So yeah, if you can’t see how a lack of scrutiny in an incestuous, intra-business arena had something to do with this mess…I’m not sure where to go from here. Transparency is a good thing in business practice.

  7. Timothy says:

    So you think Glass-Steagall semi-repeal under Clinton is to blame for this mess, although that change allowed for a lot of the purchases that have rescued failing institutions? JP Morgan buying Bear &c? Wouldn’t have been allowed prior to that “repeal”. Neither would the BofA purchase of Merril Lynch. How are the misjudged risk profiles of mortgages and mortgage backed securities related to whether or not commercial banks can own investment banks? Is there some other specific “deregulation” you have in mind? Is there a law, an act, anything you can point to specifically that’s based on sound economics to justify that argument? Can you demonstrate that the same agency and informational problems present in the current marketplace are not present in the political realm?

    And, for the record, nobody thinks business isn’t the epitome of selfishness, but I’ve a newsflash for you – human interactions are the epitome of selfishness. In short – incentives matter, yo. And it’s no more logical to assume that political actors facing all kinds of incentives that have nothing to do with actually doing what is best (see: pleasing their idiot constituents and/or special interests to stay in office) or even third or fourth best than it is to assume that businesses give a good goddamn about anything other than increasing shareholder value. I’ve no more reason to believe that Congress cares what happens to me than I have to think Phillip Morris gives a shit if I get lung cancer.

  8. Chris says:

    “Regulations can keep your own house dirty,” Oops.

    I meant clean, obviously. Although, I did laugh my ass off when I read it.

  9. Chris says:

    Sure, I hear ya….but this thing took a deep cut into the economy. Even so-called “good loans” started defaulting it got deep enough. I’m not an economist, but it just seems to me that the inter-connectedness must have a large role given the way that world markets fluctuated after the US market dove.

    Regulations can keep your own house dirty, but if you’re in a howdy-neighbor subdivision and the houses on both sides of you are on fire…you’re going to get some fire damage. Sorry for the metaphors, I’m just trying to find a way to explain my point of view.

    As for legislators or letting business do what it wants, I think there has to be a happy medium struck. This is good for business and good for citizens. There are too many instances throughout history where business was deregulated and they bent people over the barrel without the trickle-down reach-around. The way that the bottom line drives business decisions seems to corrupt the sense of morality that an average person has (and a corporation is far from an average person). Like I said, it is what it is…but if you let it run amok, it will push past its boundaries.

    Basically, I think that anyone who thinks that business or legislators will go around acting in someone else’s interest is delusional and needs to re-read about 1000 years of history.

    Tim made an argument against regulation saying that if you do so, it makes the ways that business fucks the system more insidious and less transparent. There just seems to be an acknowledgment that if you let things go unchecked…well, there are no checks. To me, it makes sense to TRY and keep things from getting out of hand.

    I have the same argument for Global Warming. You can’t STOP it, but you can do something to help mitigate it. It’s happening, and regardless of what one believes about it, the notion that we should sit around and hope for the best is insane…given our ability to control the ways in which we impact our environment(s).

    Actually, it’s an apt metaphor in this case. Everyone has a theory as to why it is getting warmer, there are people on opposite sides with contradictory arguments to what they advocate in other arenas, and finger pointing everywhere with no one wanting to be accountable for anything…especially the biggest players in the game.

  10. Vincent says:

    Sure there’s some inter-connectedness, but isn’t the point of strict regulations supposedly to mitigate the effects of market fluctuations and obviate the need for bailouts?

    If not, then what’s the point?

    It is what it is

  11. Chris says:

    Sounds like a bullshit argument to me.

    If anything, it’s the inter-connectedness of the global markets. Deregulation is not an issue in Socialist Europe; however, the fact that many large foreign banks had a lot of holdings and business in the US does. Furthermore, markets affect each other more and more these days. The US market has traditionally driven global economics to some degree, but now the non-US market(s) are worth more than the US market. So, the influence has been curbed and the relationships between them strengthened. Anyone remember Asia tumbling a decade or so ago? Remember the fall-out? It’s the same thing here except ‘old reliable’ is the one taking the fall.

    It’s not quite like the cliche butterfly flapping its wings in China, but it’s close.

    I’m surprised that the allusion was even made. It seems ignorant of the machinations in the global economy.

    I think that a lot of the issue is deregulation because I find the argument that business is not the epitome of selfishness to be hilariously delusional. I think that a lot of the current problem started when Clinton’s administration got the snowball rolling. Subsequent administrations/government majorities have only made it worse.

    I also don’t think that Wall Street can be wholly to blame because whether people like to admit it or not, it represents part of what has made the US what it is today. It is what it is….but deregulating the way it has been done in the last decade, to me, is akin to hiring a recovering pedophile to babysit your kids. In the end, they can’t help themselves and things run amok.

    People act like this is the first time this shit has happened in the US…..ignorance is bliss I guess.

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