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Re-regulation on the Squawk Box

May 11, 2009

This weekend I got embroiled in a discussion with someone who insisted that government regulation caused the economic meltdown.  This person is not alone in believing that regulation is always a bad thing, and can only cause harm.

At some point I realized that this was a silly debate to be having, sort of like whether or not there should be traffic laws.  Promoting sensible traffic laws does not make a person “anti-traffic.”  Yet somehow promoting sensible market laws is seen as being anti-market.

Good regulations and laws sustain the market, rather than thwart it.  Not all regulations are good.  But we should be debating what types of regulations are good and sensible, not whether regulation should exist at all.

Always one of the most eloquent proponents of re-regulation, Elizabeth Warren made another public appearance last week to explain why we need it.  (Skip ahead in the video above to the last few minutes to get to the good part.)

On CNBC’s Squawk Box, she explained that the past thirty years have actually been an experiment in deregulation (if you’ve never seen the show before, you’ll quickly understand the name).  In the last few minutes of the video she gives a brief explanation of our country’s economic history, and why effective regulation is crucial.  She laid out the same picture on the Daily Show and in the video introduction to the a special COP report.

In fact deregulation proceeded by several means in the past thirty years or so.  First, new products and entities emerged which escaped regulation altogether; secondly, many old banking regulations were eroded or preempted; and lastly, regulations that remained were not enforced (like fair lending laws).

Warren is clear that unfortunately, we can’t just reinstate the regulations that created the 50-year period of stability she speaks of (roughly between the Great Depression and the S&L crisis of the late ’80s).  Our brave new world requires new, fresh thinking to make the markets function for all Americans.

Rep. Barney Frank said something similar in a speech at the Consumer Federation of America conference in December 2008.  He claimed that in the FDR era, the main need was to regulate the stock market – so they created the SEC.  Now, he thinks the main need is to regulate the securitization process.  Frank described subprime mortgages as bullets, and the securitization process as guns which spread the bullets far and wide throughout the economy.  In fact, without the securitization process and a Wall Street voraciously hungry for subprime loans, there never would have been so many issued in the first place.

This brings me back to the discussion I had about whether or not regulation can be a good thing.  People seem to think, for some reason, that the government forced lenders to make subprime loans.  Indeed, that would have been a stupid policy.  But the thing is that it never happened. The real reason there were so many subprime loans is that Wall Street just couldn’t get enough of them.  And, the government turned a blind eye to the loans’ origination and the whole securitization process, until it was far too late.

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One Comment
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