The Post-Lehman World

A few years ago, real estate was all the rage. Earlier this year, the business magazines were telling us to invest in Lehman Brothers and Merrill Lynch, because those stocks were bound to zoom. Now another herd is on the march.

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David Brooks

We’re in a paradigm shift, its members say. The current financial turmoil marks the end of the era of wide-open global capitalism. Today’s gigantic government acquisitions signal a new political era, with more federal activism and tighter regulations.

This observation is then followed by a string of ethereal gottas and shoulds. We gotta have smart regulation that offers security but doesn’t stifle innovation. We gotta have rules that inhibit reckless gambling without squelching sensible risk-taking. We should limit excesses during booms and head off liquidations when things go bad.

It all sounds great (like buying a house with no money down), but do you mind if I do a little due diligence?

In the first place, the idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly. Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, “were probably the world’s most heavily supervised financial institutions,” according to Jonathan Kay of The Financial Times.

Moreover, there is a lot of lamentation about Clinton era reforms that loosened restrictions on banks. But it’s hard, as Megan McArdle of The Atlantic notes, to see what these reforms had to do with rising house prices, the flood of foreign investment that fed the credit bubble and the global creation of complex new financial instruments for pricing and distributing risk.

In other words, maybe there is something more going on here than just a bunch of laissez-faire regulators asleep at the wheel. But even if it is true that we need more federal activism, I’m a little curious about what we’re going to need to make the system work.

Surely, we’re going to need lawmakers who understand what caused the current meltdown and who can design rules to make sure it doesn’t happen again. And yet there’s no consensus about what caused this bubble.

Some people blame the Fed’s monetary policies, but some say the Fed had only a marginal effect. Some argue a flood of foreign investment allowed us to live beyond our means, while others say bad accounting regulations after Enron created a chain reaction of losses.

We don’t even have a clear explanation about the past, yet we’re also going to need regulators who understand the present and can diagnose the future.

We’re going to need regulators who can anticipate what the next Wall Street business model is going to look like, and how the next crisis will be different than the current one. We’re going to need squads of low-paid regulators who can stay ahead of the highly paid bankers, auditors and analysts who pace this industry (and who themselves failed to anticipate this turmoil).

We’re apparently going to need an all-powerful Super-Fed than can manage inflation, unemployment, bubbles and maybe hurricanes — all at the same time! We’re going to need regulators who write regulations that control risky behavior rather than just channeling it off into dark corners, and who understand what’s happening in bank trading rooms even if the C.E.O.’s themselves are oblivious.

We’re also going to need regulators who can overcome politics and human nature. As McArdle notes, cracking down on subprime loans just when they were getting frothy would have meant issuing an edict that effectively said: “Don’t lend money to poor people.” Good luck with that.

We’d need regulators who could spot a bubble and squelch a boom just when things seem to be going good, who can scare away foreign investment and who could over-rule popularity-mongering presidents. (The statements by the two candidates this week have been moronic.)

To sum it all up, this supposed new era of federal activism is going to confront some old problems: the lack of information available to government planners, the inability to keep up with or control complex economic systems, the fact that political considerations invariably distort the best laid plans.

This doesn’t mean there’s nothing to be done. Martin Wolf suggests countercyclical capital requirements. Everybody seems to be for some updated version of the Resolution Trust Corporation, though disposing of complex debt securities has got to be more difficult than disposing of commercial real estate.

It’s just that there’s a big difference between dreaming of some ideal regulatory regime and actually putting one into practice. Everybody says we’re about to enter a new political era, rich in global financial regulation. The herd might just be wrong once again.

Ach!!!

Calling David Brooks; Earth to David Brooks. Do you read me, over? I repeat: Calling David Brooks; Earth to David Brooks. Do you read me, over? This is reality-based sanity, over. C'mon David, let us know you're still in our stratosphere, over.

I think we've lost David Brooks!!! After reading his latest column, “The Post- Lehman World,” I'm at least certain he's at least exited the place all too few of us are living in already: Reality.

Pity. Sometimes that guy can really get you thinking and give you hope that the American right wing has almost developed an intellect as evolved as the rest of us; But then he goes and writes a bunch of mumbo- jumbo that leaves me mystified as to how he managed to snag a columnist for the N.Y. Times and hold onto it as well for so long.

For example: In his column “The Post-Lehman World” Brooks expresses his doubts about the new regulations the federal government is planning to create for our financial markets in response to the current problems beseeching the global financial system currently.

“The current financial crisis is centered around highly regulated investment banks,” Brooks misleadingly states. Then he actually pulls out one of the oldest right wing plays out of the book to follow that assertion up; Blame the Clinton years.

“There is a lot of lamentation about Clinton era reforms that loosened restrictions (???) on banks,” alleges Brooks.

What precisely is that supposed to mean, anyway? “A lot of lamentation?” By who? Is Brooks actually trying to pin the ill effects of deregulation on Democrats??? Deregulation??? The crown prince of Reagan policies???

Sorry David; Michael Milken was pulling Ponzi schemes on Savings and Loan Institutions back in the early 80's by taking advantage of the (then) deregulation of the industry.... Bill Clinton might not have had his first affair by then!

Anyway- didn't you tell us that deregulation wasn't the real problem, because “the current financial crisis is centered around highly regulated investment banks?” So why blame Clinton for causing problems by loosening restrictions on banks- aka deregulating them- laughable of an accusation as that is?

First: Remember the 80's??? Ah, there were those Air Traffic Controllers that Reagan fired because they went on an 'illegal' strike, and there was the S & L scandals, as I mentioned. Who could forget the rise of the Yuppies and Gordon Gekko proclaiming that “Greed is Good!” in the movie Wall Street? Ever wonder how John De-Lorian is doing and if any of his cars still run?

Those are all memories created specifically because of the deregulation of the 80's!!! Ronald Reagan. George Bush Sr. The lovable Danny Quayle.

No Bill Clinton, David Brooks. Lotta cocaine, lotta fast money, no horny, sax playing presidents from Arkansas.

The Clinton Years= Whitewater + Ken Starr x Monica Lewinsky (2) – 1 stained blue dress + NAFTA x 2. “Lamentation about Clinton era reforms that loosened restrictions on banks-” or deregulation- ain't part of the equation.

However Brooks is right to point the finger at deregulation as the primary culprit that made the current problems now gutting stock exchanges around the globe possible... even though that makes his claim that deregulation isn't the problem (laughably) wrong.... and even though Brooks seems to be saying deregulation is only wrong when a Clinton can be blamed for the destruction it inevitably causes in a society that celebrates- even worships- capitalism, free markets, Milton Friedman, and Ann Rand- such as ours.

“Two of the biggest miscreants were Freddie Mae and Fannie Mac,” institutions which, Brooks tells us, “were probably the world's most heavily supervised financial institutions.” Brooks backs this statement up by crediting it to Johnathon Kay of The Financial Times, but in reality he's simply misleading his readers once again by mixing and matching quotes from credible sources that may or may not have been taken out of context to back up his statements.

Freddie Mae and Frannie Mac ran into problems with Sub Prime Mortgages precisely because of a lack of regulations being applied or followed by: The Mortgage industry. The Credit Rating companies that were able to legally 'repackage' those mortgages as being a triple A rated investment opportunity and resell them to investment banks and individual investors around the world who had no clue what they were buying.

There is no one, no country, no agency, in charge of the global economy; As Thomas Friedman famously described it the globalized economy is like a giant herd that sets it's own rules. You either figure those rules out and follow them or you fall out of the herd, which means you're all alone, and in the financial world it's impossible to survive by yourself.

It also made it vital for each investor around the globe to 'repackage' and resell the worthless sub prime mortgages after they'd invested in them and realized they'd invested in nothing; On average each repackaged 'bundle' of sub prime mortages (and other derivatives... if you don't know what a derivative is, google it..) was resold 4 times around the global financial system and because of a pervasive belief in unfettered free markets, belief in a laissez-faire business environment, and influential men like Alan Greenspan and Milton Friedman that believed in deregulation religiously, it was able to happen.

Small government? Deregulation? That damn joke McCain always credits Reagan for telling him that he always retells to his audiences- you know- McCain mentions how Reagan used to say “Congress spends money like a Drunken Sailor,” and then he got a call one day from a man who said “As a Drunken Sailor, I resent that remark” to McCain?

Hah!

No big government, no bailout of AIG.
No bailout of AIG, tens of thousands of Hurricane victims wind up screwed.

Free markets + Deregulation= huge income gap, cuts in social services, tax inequities, a Great Depression in the 30's, and a near collapse of the global financial system today.

Ditch the Ann Rand cultists, David; C'mon back to reality. Leave Bill alone and just face up to the failures of deregulation, please.

Those of us living in the reality based world would love to see just one member of the ideological right do it.