Channeling Hyman Minsky (and making no sense whatsoever), long-time bank-basher Peter Eavis seems to think the 2008 panic came about because banks figured out how to skirt the rules laid down by their regulators.
[Minsky] identified and warned about the sort of trends in the financial system and the wider economy that helped cause the last financial crisis. That is why when everything started falling apart in 2008, some commentators said a “Minsky moment” had arrived.
Mr. Minsky pithily observed that stability gives rise to instability. As the economy grows steadily, banks and companies start to overreach. Banks lend too much, and companies and consumers overborrow, which ultimately makes the system fragile. And while financial regulation was necessary to limit excessive behavior during those stable times, Mr. Minsky observed that bankers eventually found ways around the rules. [Emph. added.]
Eavis is badly mistaken. The 2008 crackup didn’t happen because banks “eventually found ways around the rules.” It happened because banks followed the rules too well. In particular, they eagerly complied with regulators’ mandates that subprime mortgage borrowers be given mountains of credit. Once those mortgages turned sour and too many institutions ended up owning more of them than many could bear, things came crashing down. There was a Minsky Moment all right. It occurred when the nationwide housing bubble finally collapsed.
Worse, Eavis’ misreading of how the credit panic happened causes him to another misjudgment: lauding regulators for the opaque approach they’ve taken in judging the living wills and stress tests banks now have to produce as a result of Dodd-Frank. If you don’t give banks explicit rules to go by, he argues, they won’t figure out a way to get around them! Eavis is certainly right about regulators’ opacity. Seven of eight big banks had their living wills either disapproved or heavily criticized last week, and no one seems to quite understand why.
Eavis says this is a plus, but that’s crazy. Regulation by seemingly random fiat isn’t regulation at all, but more like controlled anarchy. It’s costly to banks (and by extension, consumers), and isn’t apt to control risks to the system any better than an organized set of rules and guidelines. Transparency is said to be a virtue where it’s applied to other parts of government, but lack of it is supposed to be a good thing when applied to bank regulation. The logic of that eludes me.
What do you think? Let me know!