We might consider that failure to regulate these ‘securities’ was willful and part of a bargain to ‘encourage’ lenders to make ‘sub-prime’ (read “bad”) loans.
It is known that regulatory reform of the mortgage GSEs was proposed and opposed and defeated. Was Barney Frank just ignorant of the potential problems?
Or was he part of the bargain made to allow lenders to find a way to make money off of bad loans to fulfill policy goals?
The fact of the crisis occurring in a regime of extensive regulation tells us that having a regulatory system is no guarantee of effectiveness and further, can manage to coordinate problems into a crisis of GSE proportions.
Proponents of regulated economies like to cite some ideal state where the regulatory regime works in harmony with the market producing optimal results, even after failure after failure. Recall that a large justification for the creation of the FED was to prevent big depressions. The FED was established in 1913, sixteen years before the market crash of 1929.
It seems obvious in citing the mistakes of the FED board and other interventions of government at the time that they did not know what they were doing and thus did not comprehend the nature of markets.
Seventy-nine years later, they still don’t.
They’re all Keynesians now.
I think what can be determined from this is that in a regulatory environment, a certain balance is required. If tilted too much one way, the business environment can be stifling, tilted too much the other way, the business environment can get too “exuberant”.
This does not address the desirability of a regulatory environment except in the sense that the knowledge to create proper balance can be lacking, giving rise to the constant need for further “adjustment”.
A politically/centrally regulated economy is not stable. The feedback loop has to much delay and distortion.
I bounced here off Hit ‘n Run. It impresses me that the Weisberg column has inspired a small flood of excellent libertarian short-form essays, yours included.
It would be of value to have columns like Weisberg’s come out on a regular basis, to hone the cadres’ skills and build the literature. It would be worth paying for this. Lucky for us, there are no shortage of volunteers providing targets.
And, your rabid dog analogy was golden!
Keep up the good fight!
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