I don't see how regulation could have stopped the current housing meltdown.
Joe Street goes to GreedyBank to borrow money for a home.
GreedyBank fakes paperwork and qualifies Joe beyond his means. To put icing on the cake, GreedyBank lets Joe get away with a 0% down, interest-only option ARM. Joe plunges in, the prospect of owning his dream home blinding him to financial caution.
GreedyBank sells its loans to BiggerGreedyBank. BiggerGreedyBank plunges in, the prospect of profit blinding them to the shaky loan documentation. The loans are sliced, diced, and combined with others, some also faked, others actually decent. Either way, it all becomes part of a giant financial soup.
House values fall, the ARM resets, costs rise, Joe can no longer make his payments.
Multiply across the country.
GreedyBank goes out of business.
BiggerGreedyBank goes out of business.
So where does government regulation come into play here? There are already credit rules and all banks have a risk policy. Sure, you could impose additional leverage ratios, liquidity percentages, all sorts of requirements. But it doesn't matter how good your rules and policies are, if they get broken all the time. What we need is enforcement of existing regulation. And this enforcement is already starting to happen. Investors are wary, lenders are stricter, borrowers are skeptical. It's painful, but it's the economy fixing itself.
In the end, a whole series of bad decisions led to this crisis. No regulation has ever stopped those before.
1 comment:
There is a different option for government regulation that could have helped - the government could have regulated this by setting loan terms (kind of like how NYC government imposes taxi cab fares). In general though, I'm against this kind of thing since it has a tendency to discourage competition in the field. I could be persuaded otherwise in this situation though...
As for the economy as a whole, I seriously don't think there's going to be much that either Obama or McCain can do to fix it. Frankly, I'd rather they not try to fix it either since the systems are so complicated (and by messing with one piece, something else will surely get fucked up.) We'll just need to ride it out.
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