William Black makes a point I’ve often tried to make to liberals. Of course his solution is just to ban certain kinds of market transactions. I’m reminded of an old post at Post-Austrian Economics (unfortunately removed from the web) where a sort of public-choice challenge was made to Paul Davidson over how the government could expect to handle such complexities and unexpected events in markets, and I think his conclusion was similar. Black also seems to agree with Sailer on “too-big-to-fail“. Megan McArdle & Noam Scheiber distinguish between the hazards of size & complexity/interconnectedness here, and Karl Smith chides them on the difficulty of dismantling failed banks here.
As a minor rebuttal to Black, Stan Liebowitz argues it was actually not sub-primes that blew up unexpectedly but adjustable rate mortgages.
June 28, 2009 at 4:58 am
regulation is as strong as its weakest link. since the point of regulation is always to curtail something that some subset of people want to do (otherwise you could just let them do it) regulation simply breeds ever more complex forms of CYA.
June 28, 2009 at 4:56 pm
I think Arnold Kling has described this as “the regulatory chess game”.
June 28, 2009 at 1:54 pm
I had similar ideas to Sailer’s about too big to fail. I don’t know any econ so I took my curiosity to Tyler Cowen’s (which I haven’t read much of). This post was interesting.
http://www.marginalrevolution.com/marginalrevolution/2009/01/itty-bitty-banks.html
I think I was offline when that Sailer post came out, but I just read the whole thread. Steve Hsu showed up there to tout “too interconnected to fail” in place of too big to fail.
I’m pretty dumb on the recession, but it’s hard not to find “halfbreed” on that thread convincing:
“If I had to point the finger at one guy who’s to blame for this whole mess (and there are plenty of people who are culpable), it would be Christopher Cox, the head of the SEC. Four years ago he allowed the investment banks to raise their cash ratios from 12 to 1 to 30 to 1. The Bush administration has been nothing but a whore for the corporation right from the start, and this is maybe the most egregious example. It was a prescription for disaster [...]
“The [credit default swaps] market, which totaled 900 billion in 2001, now totals 45.5 trillion, an incomprehensible sum.”
This makes the narrative from my NYT-reading friends sound at least arguably fact-based, maybe: overleveraging caused by Bush (Cox), with concomitant general finance madness, sounds like it might have contributed to the subprime frenzy. And might also be more fundamental to the credit crisis than the subprime collapse was; the whole seize-up could counterfactually have been triggered by something else other than the subprime collapse. Maybe Bush the Lesser’s deregulation on leverage ratios mattered way more, and “affirmative action lending” was not so important. But again, because of my econo-ignorance I can barely plot out these hypotheses; I can’t really evaluate them.
June 28, 2009 at 4:59 pm
Charles Davi pooh-poohs those huge CDS numbers here:
http://derivativedribble.wordpress.com/2008/11/03/the-mythology-of-credit-default-swaps/