Parts of this piece from Nobel Laureate Paul Krugman accurately capture some of the difficulties facing policymakers as they think about bank “re”regulation. Here is an example:
A second version of reform calls for a full recreation of the Quiet Period banking system. We’ll reinstate Glass-Steagall, protect the depository institutions, and let the investment banks sink or swim.
Again, I don’t think this is realistic. Shadow banking isn’t going away. Like it or not, repo and other short-term debts now play a role in our economy comparable to that of bank deposits, and pretending that stabilizing depository institutions is enough just won’t fly.
Here, he seems to be operating in the real world for a change. I wished he would talk about why shadow “banking” arose in the first place – in response to the system of regulations arising out of the 1930s banking reforms – in particular limit in interest rates paid on deposits (Reg Q), restrictions on branching activity, and a multi-layered approach to regulation in the banking and financial sector at large (the OCC, the Fed, the state banking authorities, the SEC, the FDIC). I wanted to point out three things about this Krugman piece.
“The CRA was around for almost 30 years before the problems in subprime began to develop; anyway, most subprime lenders weren’t even covered by the act. And the worst of the housing bubble developed at a time when Fannie and Freddie, under pressure over accounting scandals, were actually withdrawing from the market.
Oh, isn’t that cute. Since the CRA was around for 30 years before the crisis, it hardly could be blamed for ANY part of the subsequent sketchy housing investments that were made. Then I guess Paul would agree to the following, “since free markets were around from 1789 until the Great Depression started, it couldn’t possibly be the case that free-markets had anything to do with the Great Depression.” Or pick a better analogy. My 4 year old could come up with better analysis than that. “Toyota was around for 40 years before the problems with safety began to develop; anyway, most drivers do not drive Toyotas …” does that sound any better?
It’s quite clear that Krugman has a preferred view of the world, and just as he argues (correctly) that “nothing will convince Republicans that Barney Frank did not cause the crisis” well, there is nothing that could ever possibly be presented to Krugman to convince him that bad government, bad regulation, misaligned incentives, playing with other people’s money, the marriage between Wall Street and the Executive and Legislative Branches, etc. had anything at all to do with the crisis either. That’s fine. Just don’t dress up what you are doing as some sort of unbiased, cold, calculating economics.