Monday, October 6, 2008

Blame Game

Megan McArdle takes a look.

Over the past few weeks, much has been made of the various regulatory actions that enabled this mess. Though some are wrong, two are not: the Democrats protected OFHEO's shockingly loose regulation of Fannie and Freddie against the White House's attempt to toughen it; and the Republican-appointed SEC loosened the capital requirements for the five largest banks.

But why did they do this? Democrats seem to believe that the Republicans and the SEC simply did this out of wanton greed and a blind faith in markets; Republicans seem to believe that OFHEO, the Democrats, and Fannie/Freddie did this because of political corruption and a blind belief in homeownership for poor people. But neither side was simply accepting the risk that the whole thing might come crashing down leaving the economy in tatters and the taxpayers on the hook. The regulators, too, were misled by recent history. In recent history, lending had been safer, and risk models did seem to be performing better. Both groups genuinely believed that improvements in both computer models, and in economic theory of regulation, would allow them to identify and halt any crisis before it occurred. And just like everyone else, when no disaster occurred, they became ever more confident in their own genius.

What we need, fundamentally, is not simply stricter regulation or less greedy bankers. What we need is better economic theory of how these things play out, so that the regulators have better tools to assess and prevent systemic risk. But that's not how we're thinking right now. What we're looking for is not better tools, but someone to blame.

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About Me

Little Rock, Arkansas
I work at a local museum, date a lovely boy, and with my free time procrastinate on things like blogs.