Amar Bhide Responds
By Arnold Kling
To my earlier posts.
You will see below that Bhide expresses some nostalgia for the regulatory regime of the 1950’s and 1960’s, as he did in his book. However, that period included interest rate ceilings on deposits and banks and savings institutions, and all sorts of restrictions on interstate banking activities. One result was that when interest rates increased, people took money out of depository institutions, and funds for mortgages and small business loans dried up. Neither Bhide nor anyone else calls for reinstating the entire 1950’s regime.
Indeed, as far as I can tell, there is no historical regulatory regime to which you would want to try and return today. I will repeat my challenge to those who blame deregulation for the crisis. If you really believe that it was simply caused by deregulation, then you ought to be able to fix things by simply restoring the status quo to what it was before you think everything went wrong. If you think Glass-Steagall was sufficient, go back to 1998. If you think history took a wrong turn starting with Ronald Reagan, then go back to the banking laws as they stood in 1979.
Nobody actually thinks in those terms. I infer that blaming everything on deregulation is more of a pose than a thoughtful analysis.
Anyway, Bhide’s response to my earlier posts follows:1. I had indeed underplayed the role of politics in two respects. First your hypothesis that the size of banks will simply by virtue of their size allow them to exercise undue influences seems plausible. On the other side large bureaucracies aren’t always as nimble at rent seeking as small prosperous outfits. Regardless its an important issue and one which I hadn’t thought of. On the role of politics in promoting excessive securitization. This I deliberately glossed over, with the knowledge that the main impetus for securitization was provided by the GSEs. There was already too much going on.
2. I fully agree that no regulatory system can be counted on to last forever. (I had made a similar point in discussing the Taylor rule.) Nonetheless there are some rules which are more durable than others (in part because they allow for evolving interpretation.) For instance the Taylor rule vs the prudent man rule. Securities laws vs the tax code etc. I tried to frame my proposal to be more toward the durable end.
3. I argued that diversification ought to be an important complement to due diligence rather than a substitute. Diversification is an important safeguard against mistakes in due diligence or just plain bad luck. So its a good thing to cap exposures to any one credit or investment to some x% of the total. What I argue against is using variance co-variance matrices based on historical data to construct efficient portfolios implicitly relying on diversification as a substitute for due diligence.
4. Large scale, long lived confidence building is necessary for maturity transformation. History suggests (though of course can’t prove) this requires a government guarantee which in turn demands careful examination and oversight. And good examination ought to mitigate the Minsky problem (as I think it did in the 50s and 60s). I think the problem with the current structure is its mixed nature. Some confidence provided by a guarantee, the rest of it is privatized.
5. Finally I just don’t have it in me to blog. A book, an irregular oped or so, and I’m done.