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Speaking to economists earlier this week, Federal Reserve Chairman Ben Bernanke rebutted the argument that easy money caused the housing bubble. "The best response to the housing bubble would have been regulatory, not monetary," Bernanke concluded.
Fair enough — but the regulatory philosophy that Congress is following, with Fed support, is the same line of thinking that got us into this mess: the idea that regulators can prevent financial failures by assessing risk from the top down.
Instead, regulators should make the economy better able to withstand impossible-to-predict financial failures. Then, market participants will judge risk from the bottom up — knowing they won't get a bailout if they're wrong, because the economy can survive their failure.
We learned in the 1920s what Bernanke is saying now: that monetary policy is no substitute for financial regulation. Back then, the government had just one way to dampen financial excess: the Fed. But when the Fed tried to quench a stock fever in 1928, it had to raise interest rates for everyone, harming the economy and still failing to cool overheated stock investors.
That experience showed that there is no such thing as a Goldilocks interest rate — one that's low enough to encourage healthy lending but high enough to discourage excessive speculation.
In the Depression's aftermath, President Roosevelt and Congress understood a truth that Bernanke repeated on Sunday: "Monetary policy is ... a blunt tool, and interest-rate increases ... sufficient to constrain the bubble could have seriously weakened the economy."
So FDR and lawmakers armed regulators — the Fed and the new Securities and Exchange Commission — with more delicate instruments, including the power to impose clear, consistent limits on speculative borrowing. These limits rightly didn't prevent investors from making colossal mistakes, but they did cushion the economy from the effects of such mistakes.
The borrowing limits meant that investors in stocks and other financial instruments, while free to take risks, were not free to borrow so much that their errors would bankrupt the financial system. Regulators also won the power to impose disclosure rules on financial-instrument trading, so that people had a fair idea of where risks lay, muting panic in a crisis.
These rules worked then and still work today. When the tech bubble burst in 2000, people lost money on stocks, but they didn't leave behind so much debt that they bankrupted the lending system.
And when the investment bank Barings bankrupted itself in 1995, it didn't take the rest of the financial industry with it. Global investors knew that Barings' derivatives trades had been subject to rules and debt limits that protected the economy from its failure.
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Politicians, businessmen and labor union spokesmen have whined about the decline in U.S. manufacturing. Before looking into what they say is the sad decline in U.S. manufacturing, let's examine what has happened in agriculture. In 1790, farmers were 90% of the U.S. labor force. By 1900, only about ...
Because of President Obama's outrageous profligacy with the public purse, strong policy tilt to the left and weak performance on the world stage, some commentators foresee a failed presidency that does profound and permanent harm to the nation. Others, although not predicting Armageddon, point to ...
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Perrigo (PRGO) has shaped a flat base with a potential 41.04 buy point. You could, however, interpret the weekly chart as one huge base, dating to September 2008. From that perspective, the recent action is a long handle. In both cases, the buy point is the same. Yet the current chart action has a ...
Posted By: niteski(260) on 1/7/2010 | 11:01 PM ET
Regulations are bound to fail. Those in Congress see things not as they are but how they want them to be so that reelection is possible. The individual that takes the punchbowl away, first effects the poorer in the nation and will be immediately labeled as a racist. The two are incompatible.
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