Jared wrote:I disagree, Rob. For example:
http://bigpicture.typepad.com/comments/ ... -exem.html
Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.
You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.
I'd categorize that as deregulation. Or, in the other direction, if you had tighter regulations on subprime lending, you wouldn't have the subprime mess. (Didn't subprime lending come about from the lessening of restrictions in usury laws?)
On the subprime crisis and deregulation...
http://www.stradley.com/articles.php?action=view&id=279
Legislative deregulation of the banking industry has also fueled the subprime lending industry. In 1980, Congress adopted the Depository Institutions Deregulation and Monetary Control Act (“DIDMCA”). DIDMCA helped the Savings and Loan (“S&L”) industry stay competitive with nonfederally chartered banks where consumers received higher rates of return (Howell, 2006). DIDMCA also enabled the S&Ls to recoup the higher interest rates they were paying by allowing them to preempt state usury laws for loans to consumers secured by first liens on their homes (Howell, 2006).
In 1982, deregulation continued with the passage of the Alternative Mortgage Transaction Parity Act which extended federal mortgage-lending regulations to most residential loans, including the permitted use of variable interest and balloon payments (Howell, 2006).
These laws opened the door for the development of a subprime market, but subprime lending would not become a viable large-scale lending alternative until the passage of the Tax Reform Act of 1986 (“TRA”) (Chomsisengphet and Pennington-Cross, 2006). The TRA increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home (Chomsisengphet and Pennington-Cross, 2006). Next, the Financial Institutions Reform Act of 1989 (“FIRREA”) addressed the costly S&L failures of the 1980s and created incentives for S&Ls to operate as thinly capitalized mortgage brokers relying on the secondary market for loans (Howell, 2006). Finally in 1999, Congress passed the Gramm-Leach-Bliley Act permitting financial service providers to merge with insurers (Howell, 2006). Thus, banking deregulation enabled lenders to offer more varied loan products, which were attractive to more varied consumers, and further gave incentives for more lenders to enter the market.
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We're talking on two different levels here now, which is cool, but we should be clear. There's regulation impacting the consumer mortgage end of things and regulation affecting the investment banks and Wall St. etc.
GLBA is wrongly villified, IMO. There's a tendency for any dergulation to be blamed for every market woe, but without it we wouldn't have had some of the private-sector bailouts/mergers that we've seen in the last few weeks. And the fundamental causes of this crisis far ante-date GLBA.
Countervailing many of those moves was a long-term trend of regulating instututions by requiring them to extend loans to to lower-income borrowers. This
bi-partisan trend was represented in legislation (Community Reinvestment Act, the 1989 Home Mortgage Disclosure Act, the 1992 GSE Act amendments), hell even GLBA has a role in this, as well as in Federal Regulations (HUD Rules, Fannie and Freddie regs etc.) and litigation. Banks were bullied through this process into extending loans to far less credit-worthy individuals than they otherwise may have. They would then turn around and bundle those loans to move them off their books.
I have a fair amount of professional experience with this doing foreclosures on both sides. I've had client bankers who were very, very liberal and totally behind the concept of extending ownership as widely as possible. But they were scared to death. Scared on the one hand of being targeted by ACORN or similar organizations and on the other hand of being stuck with mortgages of little or no value. And I've had more borrowers than I can count who got mortgages they had no business getting...and not because of predatory lending etc.
Again, it's hard to blame a culture of deregulation when regulations like these exist and expand the way they have.
Jared wrote:
And your argument about traditional investments and recent accounting rules doesn't make any sense to me. People invested in less "traditional" investment because there was greater yields in things like subprime investing. But there were greater yields in these things because they were unsustainable. People made loads of money off subprime mortgages...but they weren't sound, and it fell apart.
And don't forget laws like the Commodities Futures Modernization Act, a deregulatory bill passed in 2000 that directly led to the Enron crisis.
The greater yields did not stem solely from the risky nature of the vehicles. Given the exact same yield on a similarly risky vehicle in heavily-regulated and lightly regulated markets, rational actors will always opt for the less-regulated. There is a real cost associated with meeting the requirements of regulation, stemming principally from legal and accounting costs that cuts into your returns. And of course you will have an easier time finding buyers and sellers and consumating trades in a less regulated market as well.
Jared wrote:Huh? I'm not saying all regulation = good; and all deregulation = bad. Command economies, for example, are an example of too much regulation. The best thing is to find a middle ground where you have enough regulations to have a honest, fair, functioning system, while still allowing the free market to work where it works best.
We
totally agree in theory, then. So we've got that going for us
On a more political note, these antecedents bring up several Obama and McCain related points. McCain's support for GLBA, Obama's community organizer background, McCain's 2005 comments about Fannie and Freddie, Obama's pockets being enriched by Fannie and Freddie and the stink of ACORN's involvement to name just a few.
I think we need to add a week or two to the election cycle just to work through all this
