By Arnold Kling
I will be interviewed on June 25th at 2 PM eastern time in a “webinar,” which means that if you participate live then you can ask questions. You can register here. I have attended a couple of these as a listener, and they were pretty high caliber. My guess is that I will be better than my usual self, because David Evans is a good interviewer.
Today, I was at a conference that David helped organize. I am not at liberty to disclose the other participants, but below I will offer notes on what was said.
One participant noted that the Obama Administration White Paper was heavy on blaming the folly of the private sector and defects in regulatory structure for the crisis. It was light on flaws in regulatory policy or execution. That is also my view.
There is a risk that the white paper serves to increase the uncertainty of the business environment. If you are operating a financial institution today, you cannot set up a new division or line of business without knowing whether it will be whacked by regulators down the road. One of the risks of having a “financial product safety commission” is that it will knock down products after the fact, which in turn will have a chilling effect on innovation.
It is very typical of government to respond to a failure with a re-organization. That appears to do something, but in fact does little. (Me: that may be the best possible outcome–a reform that appears to do something but in fact does little)
One participant argued that we need to re-invigorate securitization. He pointed out that you cannot replace the hundreds of billions in financing that was flowing through that system with straight bank financing (banks holding mortgages the old-fashioned way). He suggested that the problem with securitization previously was the high leverage involved in the way banks held mortgage securities. If instead the securities were pooled into mutual funds, then there would not be so much leverage. (ME: how much more net financing do you get out of a non-leveraged securitization model than out of a reversion to old-fashioned banking.)
One participant pointed out, as even the Obama folks have admitted, that regulatory structure cannot be the key issue in the financial crisis. Other countries, with regulatory structures along the lines recommended in the White Paper, have done as badly as we have, and in some cases worse.
One participant pointed out that most of the bad mortgage loans went to finance new housing developments in suburbs in key sunbelt states. Those are not CRA areas, making this another reason not to blame CRA.
More in a subsequent post’