In his op-ed in today’s Wall Street Journal, Tim Geithner informs us that the effectiveness of the Dodd-Frank Act will depend “on the quality of judgment of regulators . . . as they flesh out the remaining reforms” by writing the new rules the law requires. Yes. Well. That’s reassuring, isn’t it?
You’ll forgive me if I don’t share the same faith in the soundness of judgment of our nation’s financial regulators that the Secretary of the Treasury seems to have. The regulators were the ones, after all, who stood by and did nothing to prevent some banks from aggressively expanding into subprime mortgage lending. They were the ones who allowed the GSEs to liberalize their underwriting requirements in order to facilitate even more subprime lending. And they were the ones too, who, by keeping interest rates low for so long, facilitated the housing bubble in the first place. But not to worry! Tim Geithner now promises us that Dodd-Frank will prevent the next crisis from happening, since its implementation will be guided by . . . the sound judgment of the financial regulators!
Geithner’s piece this morning is a load of twaddle. First, he seems to not have straight how and why the credit crunch happened to begin with. It wasn’t the collapse of Bear Stearns that kicked it off in earnest. (JPMorgan stepped in with help from the government and took over Bear in an orderly fashion.) It wasn’t ARM re-sets that set off waves of defaults (short-term rates were so low at the time that the re-set rates weren’t much higher than the teasers). The problem wasn’t the $600 trillion derivatives market, regardless of how they were funded. It was subprime mortgages. The banking system wrote way too many of them, and on ridiculously easy terms. And the banks did this not because the government was powerless to stop them. The banks did it in part because the government was encouraging subprime lending, in the name of “expanding home ownership,” I’m not one of those people who believes federal housing policy was the sole cause of the subprime crackup. There’s plenty of blame to go around, from flawed ratings-agency models to misguided compensation systems. But, please, don’t tell me that regulators’ hands were tied as the problem came to a head. The government was no bystander; it played an active part in creating the mess.
In the meantime, the Dodd-Frank law that Geithner says we should all shut up and stop complaining about won’t do much to prevent the next crisis, and has plenty of provisions that are irrelevant to the task. The Durbin Amendment, for instance, which regulates debit card interchange, is an old-fashioned government stickup of the banks that has nothing to do with safeguarding the system. And how does the CFPB’s planned regulation of debt collectors and payday lenders relate to preventing the next crackup ? The Volcker Rule, meanwhile, is a solution in search of a problem. One would think that one lesson policymakers might have come away with following the crunch is that the asset side of bank balance sheets should be more broadly diversified, not less so. That underlying problem, remember, was that too many institutions owned too much of the same thing—residential mortgages or related securities. Yet the implicit logic of the Volcker Rule is that the government knows better than banks themselves what they should prudently invest in. Well, we all saw how that worked out last time.
Geithner seems to think that Dodd-Frank will be some sort of cure-all in preventing another financial crisis. It won’t be. All the law does is add a new thick layer of bureaucracy to a regulatory system that was manifestly unable to spot and prevent problems the last time around. Geithner’s faith in “the quality of judgment of regulators” is almost touching in its innocence. It’s also nutty. Should financial regulation be reformed? Of course. The prior system was 80 years old and designed to oversee a financial industry that in many ways no longer exists. But rather than ramming through reforms in the heat of the moment, which Geithner believes was so laudable, maybe some cool deliberation and debate is in order, so that Congress might come up with a solution that will actually work. Meanwhile, Geithner’s mindless griping that we should pipe down and go along with this Dodd-Frank monstrosity is outrageous.
What do you think? Let me know!