Some Notes on Financial Reform
By Arnold Kling
This afternoon, I’m scheduled to join a press call with Simon Johnson and two Senators discussing a proposed amendment to the financial reform bill. Simon and I have been in alignment since the day we “debated” the issue of nationalizing the then-insolvent banks. I was supposed to be against nationalizing banks, but I thought for some reason they were talking about solvent banks. I thought that banks like Citigroup should have been nationalized and sold off, rather than bailed out. I still think so.
Anyway, Simon and I agree on breaking up big banks. My ideal financial reform would actually, you know, reform stuff that was at the heart of the financial crisis, as opposed to just trying to put Humpty-Dumpty back up on the wall with some regulatory glue and tape. I would try to break the addiction to lenient, subsidized mortgage credit by closing down the government pushers. I would take the credit rating agencies down from their perch by using market discipline instead of capital regulations that reward AAA ratings. I would let securitization die if it can’t survive without a government feeding tube.
Here is Anil Kashyap giving what seems to me a very different view of what went wrong and how to fix it. He says,
it was like a Ferrari that hits a pebble and crashes.
There is a presumption that the type of finance we had five years ago was basically a good thing–we just need to put in some better controls. The thinking is that securitization created real wealth. I think it created wealth artificially by exploiting capital regulations. I believe that with a public policy less friendly to Wall Street, we would have a very different financial system, not just an approximation of the system of 2005 with a few safety features added.