TheAgitator.com
Bush and Regulation
Wednesday, October 29th, 2008So I just finished editing a piece by Veronique de Rugy for an upcoming issue of reason.
There’s little debate that President Bush has spent wildly over the last eight years, or that he has vastly expanded the size and scope of the federal government. But thus far, Obama and the Democrats have been unchallenged in their portrayal of Bush and the GOP as reluctant regulators–even as deregulators.
I don’t want to give up too much about de Rugy’s piece, but I’ll just say she convincingly and thoroughly refutes that claim. Bush set regulators loose like no president since Roosevelt. Spending on regulatory agencies is at all-time highs, across the board, including at the agencies that regulate banking and capital markets.
Bush’s administration failed at many things. But de Rugy’s piece–which will appear in our January issue–shows it wasn’t because he was ever shy about regulation.
I’m guessing he spent loads for really crappy results.
Gotta put Bob and Mary-Lou’s sone to work somewhere so if they were too much of a pansy to help out in Iraq, they got a nice gig regulating oil companies and leases and ended up with a fat bank account and free blow-jobs.
Whoopdeefrigindoo…
The Mrs. and I were discussing this last night. Some of her crunchy friends blame the whole “meltdown” or “credit crunch” on deregulation and greedy capitalists. “Some things can be run by the free market,” one said “others should be managed by the government.” I’m not exactly how to even debate this topic anymore. It’s as if the nation of sheep are reciting the same mantra over and over, “new capitalism bad, managed economy good.”
To Ganja: This is a good response to your wife’s crunchy friends. This was GW’s response to a similar argument on ABC’s This Week with Stephie (roundtable early October).
George Will:
It is hard to state the truth with more elegant imprecision. In fact, much of the crisis we are in today is because the government set out to fiddle the market. We had regulation in effect with legislation that would criminalize, as racism and discrimination, if you didn’t lend to non-productive borrowers. We had Fannie Mae and Freddie Mac existed to rig the housing market. Because the market would not have put people in homes that they could not have afforded.
Dont forget the rating companies like S&P which gave all the MBS full of questionable loans a AAA rating.
Regulation Bush style meant letting your friends do whatever they wanted and forcing his (or rather, his friends’/contributors/controllers) vision on the rest of us. I see no reason why the financial sector would have been handled any differently. The fact that he knows squat about economics wouldn’t stop him. It never has before.
Libertarian Mac – CRA and Fannie/Freddie are red herrings, and George Will knows it. Every dollar of the TARP bailout is going to private for-profit entities who bought or insured mortgage assets expecting to make a profit. Most of the subprime stuff owned by the banks is worse than the Fannie/Freddie conforming mortgages.
The GSE’s might have been a screw up, but if they were the sole cause the whole problem would have gone away with their nationalization.
The larger problem that caused the housing bubble, the credit crisis, and the stock market crash is a private sector issue.
Perhaps it was irrational exuberance on the part of the private sector based on what was going on at Fannie and Freddie.
I can’t see how one can look at a situation where derivatives, and massive numbers of bets on bets called credit default swaps, exploded from a few trillion to 1.5 quadrillion dollars in less than a decade, and conclude that the resulting crisis was the result of too much regulation. Growth like that is not possible without massive fraud, in my opinion.
After all, the subprime loans could be payed off with a ‘mere’ 200 billion, which is far less than the 3 trillion that the world has spent to put more water in behind a huge leaking dam of derivatives. And when that dam breaks we will all be saddled with a debt greater than all of the worlds GDP several times over. I can’t remotely predict what might happen as a result of that, because that has no precedent. The banks continue to sit on these huge mounds of casino toilet paper, rather than come to grips with the fact that it has no intrinsic worth. That’s why they are hoarding cash; they are hoping to be able to cancel out the huge piles of anti-cash in their vaults.
One last point. A large price tag does not buy either results or competence; that is surely one of the great lessons of the Bush administration. Don’t be blinded by ideology, Radley; I’m no fan of regulation, but allowing fraud on this colossal scale is not deregulation, it is turning a blind eye to the robbing of all the world, and your children, and their children, and their children.
I know it’s not your article, but since you are bringing the argument over here…
You do realize the amount of spending on regulatory agencies is completely different from actual regulating? The Bush EPA, for instance, seems to have a bunch of “regulators” who spend their time working with companies to find ways to evade regulations and using their regulatory power to preempt the State of California (among others) when it tries to enforce minimum standards.
This may technically qualify as “regulating” because it involves a regulatory agency doing something, but it is certainly not what people mean when they refer to regulating and someone being a “regulator.”
Libertarian Mac,
George Will should stick to baseball, ’cause he doesn’t know squat about the current financial mess.
8 years of Bush inc., and the Republicans, has cost us an unparalleled loss of liberty, privacy, and national wealth. He put into place the monitoring and regulating infrastructure to make sure everyone better follow not only the draconian, unconstitutional, regulations he came up with but whatever our rulers come up with next. He basically did EVERYTHING we were supposed to be frightened the Democrats would do if they ever got control (except raise taxes). Bravo GW, thanks to you and the republicans we entrusted who let you run hog wild, we now have the biggest, most oppressive, government since the birth of our country. Between the (anti) patriot act, the new improved, military commissions act, militarizing our local police agencies, and doing away with the concept of a free market economy, I don’t envision us ever returning to anything close to a prosperous, land of the free.
“In God We Trust” on our money cracks me up. What you better trust is if you don’t pay the tax/extortion, however high our rulers decide it should be, the Kings men will take your home and e-credits and throw you in the debtors prison. When they finally centralize all commerce into one government corporation I hope there’s a giant bronze statue of Bush in front of every government store. (Kind of like the Stalin one)
If you have kids, steer them towards government jobs. The Kings men will always be fed.
“I can’t see how one can look at a situation where derivatives, and massive numbers of bets on bets called credit default swaps, exploded from a few trillion to 1.5 quadrillion dollars in less than a decade, and conclude that the resulting crisis was the result of too much regulation.”
How is it that people who knew nothing about financial markets, or economics in general, a month ago have already pinpointed the exact cause of the current financial mess? While the so-called experts have only begun to sift through the seemingly infinite data, genuises like Li figured out that the real cause is “massive numbers of bets on bets called credit default swaps.” Of course it’s a just a coincidence that the answer is a three-letter acronym (anything more complicated would require human level thought) and fits perfectly with his worldview (capitalism is teh ghey).
I am pro-capitalism, but I am also anti-fraud. If you are for both of those, guess what, that makes you a gangster, or perhaps a bankster. And nice that you’ve decided that I knew nothing about the markets a few months ago; when I saw this coming as the derivatives market exploded in the mother of all bubbles back in 02-04, I realized how it would end, and sunk all of my money in gold, anticipating that paper would go out of fashion eventually. That worked out well for me, and judging by the wide divergence of the paper and physicals markets for PM’s at the moment, I’m glad I’ve got it stashed as physical.
But, you know, just because ‘I’ve got mine’ doesn’t mean I’m going to lie down and let a bunch of bankstas enslave mankind for generations to come under crushing debt. Perhaps that empathy disqualifies me from your capitalist club, but I guess my soul is too precious a thing for me to issue securities on, even if they would get a AAA rating.
By the way, if you would like to get informed, I’ve got a few web sites for you.
Mike Shedlock goes by Mish, saw this coming, and is very much an Austrian economist (i.e. libertarian). You’ll find yourself agreeing with him a lot, once you wrap your head around all of these fake investment vehicles floating around.
http://globaleconomicanalysis.blogspot.com/
Professor Roubini, the so called Dr. Doom, was right about the danger of the derivatives back when that got you laughed at, and though he is a Keynesian economist, and thus pro-intervention in the markets, he has a good comprehensive understanding of the subject.
http://www.rgemonitor.com/blog/roubini
And if Dr. Doom is too optimistic for you, you could read The Automatic Earth; though Stoneleigh and Ilargi tend to write a -perhaps- too bearish editorial each day, they have a great talent for selecting the most important financial stories of the day, and presenting them in a concise format. Great for speed readers.
http://theautomaticearth.blogspot.com/
Read a few dozen books, attend a few lectures, and read those blogs for a few years and perhaps you will also understand why we are well and truly f^(%ed.
If you have a mortgage (or any other debt), you’re basically in a CDS with your bank. Since you’re just preparing for the End of Days, I suppose you’re not a badass gambling banksta.
Also, I think you’re confusing CDS with CDO.
Three axioms of the Bush Presidency as I saw them in 2000
1. It will be very expensive
2. It will not be effective
3. My friends will get rich
I don’t know a ton about economics, but my suspicions are that W’s regulatory actions follow the axioms.
January? Why so long?
I have to admit I’m always amazed when liberals say they hate Bush so much. He spends like a liberal Democrat. He regulates like a liberal Democrat. He has a similar view of government as a liberal Democrat when you get to the basis of his views: get the right person in there and government can be a very good thing. Nevermind that the Democratic process is one that almost always ensures that the person in charge is venal and cowardly. About the only place he breaks ranks is in foreign policy and on taxes, but even his tax cut wasn’t that out of line with those who favor discretionary fiscal policy. I have very seriously argued that Bush is not a conservative in the sense of Reagan, but instead a big government Republican who is hard to tell apart from a Democrat.
Credit default swaps, CDS, were deregulated in a bill passed through Congress with Republican votes in 2000 and signed by Bill Clinton.
And it isn’t something as simple as regulation or deregulation but the issue of discretionary policy. If people think the government is going to bail them out if things get too bad, then people will be less cautious. There are multiple versions of this in economics. In insurance it is called moral hazard. If you insure someone then they might be less careful since the insurance reduces their losses in the bad state/outcome. In discretionary government policy it goes by the name of time/dynamic inconsistency. Typically one finds applications to monetary theory and the potential inflation/unemployment trade-off, but it can work in other areas.
Think of it more of a problem that government will rarely if ever find just the right amount of regulation. Credit Default Swaps can serve a useful function. Futures contracts are a form of derivative and help stabilize certain markets like agricultural markets which without futures contracts can have significant issues with very serious boom and bust cycles given the lag in prices. But if the government is going to start backing in some fashion types of derivatives/CDS and not others then you can some problems. For example, Ginnie Mae, a government agency, will back up the mortgages made under their auspices. Fannie and Freddie backed the paper that they created when generating MBS and could in theory borrow from the U.S. treasury.
Deregulating partially in that environment and toss on the accounting scandal at Fannie and Freddie and the push for “affordable housing” and a desire to keep the good times going and you have a big mess. But, to pretend it is all Bush’s fault is the viewpoint of either and ignoramus or blind partisan fool. I let people pick whatever catagory they think best fits them if they want to insist on this “blame just one guy” veiw point.
For example Bush wanted to increase oversight and regulation of Fannie and Freddie, but was stopped by the Democrats. The Republicans helped repeal Glass-Steagal which was a factor. Bill Clinton signed several of these bills. Then there are the horrible incentives many financial institutions set up that induced employees to focus on the short term. CRA was one of the policy vehicles under which many of these changes were made and that was put in place back in the late 1970’s. Fannie Mae traces its origins to our last huge financial crisis the Great Depression. Mortgage Backed Securities were created by Ginnie Mae in 1970, IIRC. Fannie and Freddie created the bulk of MBS’s.
The idea that one simple little act of deregulation or regulation or re-regulation, whatever you want to call it, would have saved the day is…well stupid.
Nice post, Steve, but it’s ultimately pointless.
People who say things like, “I saw this coming as the derivatives market exploded in the mother of all bubbles back in 02-04, I realized how it would end, and sunk all of my money in gold” (what a piss-poor strategy for someone who foretold the future) have already decided that derivative markets are evil and no amount of commenting will show them the light.
Also, on Bush’s regulating and big spending, the White House was so concerned with creating a permanent Republican majority that it’s hard to tell where idealogy stops and politics starts. On one extreme, Bush could just be the Dixiecrat he appears to be at face value. On the other, he could be a true Goldwater conservative whose Machiavellian instincts outweigh ideology. Maybe historians will figure it out, but everytwhere on that continuum is shameful.