Another case of going along with the powers that be is the abuse of FEMA. I understand that it was a factor in the devastation of New Orleans (leading to overbuilding of the swamps that should have protected the city). Now there's been a huge amount of building in San Francisco, currently awaiting another Big One. I'd like to think that if/when it happens, we'll be covered. But a major earthquake combined with regulatory failure, in the depths of a recession, what a nightmare. Any idea if anyone is looking after this insurance-abuse problem?

But didn't the Fed deliberately help the housing bubble as part of recovering from the dot.com bust? And that it got out of hand is no surprise, given how the Bush administration was disinclined to take the punch bowl away?

CDO's and trick mortgages probably were major contributors to the housing bubble, if not the actual cause, and in principle they could have been curtailed by regulation (but does the proposed legislation do this?). I don't know if the Fed had the power to clamp down on these things.

Actually, the bubble was to a large extent a deliberate creation of the Fed (as David W. says). Housing and other mortgage-related activities are an obvious target for stimulation by interest-rate reduction and Greenspan publicly boosted ARMs. Once committed to the policy of stimulation this way, it would have been difficult for even a relatively objective person to reverse course. Greenspan had already shown he was oblivious to the business cycle by his absurd argument about how tax cuts were needed to avoid paying down the debt too fast. Bernanke inaugurated his tenure by stating on principle that it was neither possible nor desirable for the Fed to recognize asset bubbles. If the Fed does not recognize or acknowledge its responsibility with respect to bubbles, how can it regulate to avoid them?

The front-page media don't cover economic matters in terms of facts, they focus on personalities, and Fed chairmen are still on their list of heroes. Greenspan has been personally discredited to some extent, but the Fed as an institution is still invested by the media with supernatural wisdom. The actual record of the Fed's accomplishment - or really lack thereof - shows that it is not capable of directing the economy. Unfortunately it is not just the media which have these misconceptions, but many economists and perhaps Obama himself.

Dean is absolutely right that the Fed and other "regulators" failed miserably, but I would say that the solution (if there is one) is a major reform of the system with reduced powers for the Fed, rather than attempts to get better regulators.

But if there's too much focus on the "housing" bubble, people might start thinking about the dynamics involved, and realize it's a land bubble. And we don't want that! There's danger then that people might want to focus taxation on land rents, and then where would the wealthy get their massive profits for nothing?

See Paul Krugman's blog today, referring to his own statement in 2002 that the Fed would probably have to create a housing bubble to replace the dot.com bubble. This was monetary policy in action.

What would a workable regulatory structure look like?

why aren't dodd and frank front and center on this? they played the largest part of the housing portion of the overbuild death spiral that created a need to give a warm pulse a mortgage. (btw cds' are the issue w/ the crunch, not the paultry 3% of gdp housing represents).

We need to hold the pols accountable to us! its our country, they should represent and serve us!

Dean's expecting way too much of the media. The idea that this regulatory scheme essentially keeps the fox in the hen house is more than their pea brains can process.

"The media failed dismally in its coverage of the housing bubble. They appear to have learned nothing from this failure."

Nor the dot.com bubble before that and I remember most analysts being bullish at that time.

How do we get this debate going on the Hill?

It goes beyond not wanting to hold regulators to account for their failures. The entire way the government has responded has been to prevent any kind of real accounting for crimes or errors.

NO CEOs were forced out. NO boards of directors were shut down.

It even goes beyond the economy: NO torturers (a few minor token abusers only) have been held to account in the endless war against a tactic. NO one who ordered torture is being held to account.

No one is guilty of anything. No one is culpable for their mistakes. Instead, "mistakes were made" by...the universe I suppose.

Escape and evade responsibility, THAT is the American Way.

I'd like to know what qualifies this guy Geithner for the job of fixing our financial system. He sat in the middle of Wall St. in a big plush office with all the perks & a fat salary provided by us for 5 years(as President of the NY Fed no less). And what we were paying him for? To prevent a financial crisis. And what did he accomplish? Zero. Nada. He was either too dumb or too lazy or both to prevent it. So now he's going to fix it? Lots of luck.

From Wikipedia -

"In October 2003 at age 42,[15] he was named president of the Federal Reserve Bank of New York.[16] His salary in 2007 was $398,200.[17]"

We paid Geithner enough for him to buy a $1,602,000 house in 2004. He put it on the market for $1,635,000 in Feb. & reduced price to $1,575,00 a few weeks later. Rented it out for $7,500/month.

Not bad for a government job.

The lessons were there from the S&L crisis too.

William Black describes it in
http://www.amazon.com/Best-Way-Rob-Bank-Own/dp/0292706383

See http://en.wikipedia.org/wiki/William_K._Black

for the author.

To me, the big lesson was how congress intervened against regulators to protect the fraudulent S&Ls. See Keating 5.

The media failed dismally in its coverage of the housing bubble. They appear to have learned nothing from this failure.

On the contrary, I think you yourself have shown that they learned that there were no consequences for their failure. Why would they rock the boat?

How do we hold Greenspan accountable? He has already 'fessed up. Me culpa, mea maxima culpa.

Dean,
Aren't you forgetting the role of human nature? You imply that there is a regulatory scheme that could prevent bubbles. But I doubt this is possible.

As an adult, I've witnessed collapsed bubbles in Texas real estate (in the mid-80s), in Internet stocks (in 2000) and now in housing and mortgages. In all three cases, I doubt that any naysayers would have been heeded, no matter how smart and compelling they were.

During times of mania, no one listens to the person who predicts that things won't turn out well. You say the regulators "didn't" stop the housing bubble, I think it would be correct to say that they couldn't. They would have been shouted down.

When a bubble is inflating, anyone delivering a warning is fated to be ignored. Let's call this proposed new meta-regulator "the Department of Cassandra."

There was a regulatory scheme in place until about 1980, put in place by the New Deal. New Dealers actually did learn from the 1929 Crash and Depression and not only bailed out banks (the Fed was MIA) but set up a framework that served well. Rather than update regulations as necessary, Congress was persuaded by supply-siders and monetarists that markets could take care of themselves and the Fed would keep things steady by controlling the money supply (or manipulating interest rates, or something).

Wall Streeters still have not caught on to the dangers of overexpansion and gambling, but they have learned different things, such as how to get the Fed and government to bail them out.

They still don't get it. Writing more meaningless crap regulations is a waste of their, our & mostly the economy's time. Giving people more authority & responsibility over the financial sector without holding them accountable is an exercise in futility.

Bernanke, Geithner & their thousands of subordinates were given authority & responsibility (and paid fat salaries) to prevent a crash of the financial system & they failed miserably. And Obama still hasn't held them accountable. If fact he's added insult to our intelligence by giving these same inept failures authority over fixing the crash they had the authority & responsibility to prevent.

I think accountability is a meaningless concept for Obama. Look at his association with the illustrious Rev. Wright. Does anyone think that Bernanke & Geithner would have given trillions of our dollars to the stupid bankers if they knew they were going to be held accountable for the results?

Either these people are too stupid to see this or they are knowingly doing extreme damage to the long term viability of the country they happen to live in. Like Congress. I'm voting on stupidity.

Isn't it important that the "need" to keep reinflating bubbles itself arises from something deeper: the decreasing proportion of national income going to less wealthy consumers? Business won't invest unless they can depend on future profits which come from consumption.

Although some have argued (Krugman, not sure about Baker) that future consumption could come either from mass consumption or extreme elite consumption, doesn't it appear that the highest national growth rates (such as the 3% during the "Golden Age of Capitalism from WWII to 1970) come from mass consumption. And of course that's only fair too, do we really want to live on a slave ship? Would we tolerate that? But it looks to me like earlier epochs which depended primariliy on elite consumption had miniscule average annual income growth rates.

So, as a result of continuing Reaganomics (and Volkeromics) which is dedicated to reducing the income of working class people (by strangling unions, making everyone fear for their jobs, etc), we're creating a vicious circle in which the only way to keep the "economy going" is to keep inflating asset bubbles to replace the previous asset bubbles that just collapsed. And soon there's nothing less.

It would seem to me that the primary fix to the problem would be something like the EFCA, the Employee Free Choice Act, and better enforcement of existing laws. And single payer health insurance (which helps everyone, but lower income people most of all).

In April, 2008 Alan Greenspan wrote a defense of himself in
The Financial Times.

His thoughts on Regulation:

“Aside from a far greater effort to ferret out fraud (a long time concern of mine) would a material tightening of regulation improve financial performance? I doubt it.
The problem is not lack of regulation but unrealistic expectations about what regulators are able to anticipate and prevent. “

“Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle. It would have required insights that would enable regulators to override the investment judgments of the most experienced analyst of the private sector, the very people on whom regulators rely for their market insights.”

(Hmm,
So Alan, isn’t that like the Banking Commissioner asking Willie Sutton for advice?)

Christopher Whalen guest responds to Greenspan’s comments.

“… in the two decades of Greenspan’s tenure, the Fed’s Washington staff, other regulators and Congress allowed and enabled Wall Street to migrate more and more of the investment world off exchange and into the opaque world of over-the-counter instruments. This change is described by people like [then] Treasury Secretary Hank Paulson as ‘innovation’ but as my old friend Martin Mayer rightly calls it ‘retrograde’.”

….

“Would that the Congress and the Fed had the courage to confront Paulson and the other banksters who have turned America’s financial markets into an increasingly unstable, derivative house of cards. If all federally commercial banks and funds subject to ERISA were required by law to invest only in SEC registered exchange –traded instruments, the threat of further systemic risk could be eliminated tomorrow. What a shame that neither Chairman Bernanke nor
[then] FRBNY Timothy Geithner said that last week [March 2008] when they appeared before the Senate Banking Committee.”

( I’m going with this guy- rather than consult Willie Sutton he would arrest him)

This note is mainly correct but leaves out some of the blame that fails squarely on Greenspan's stooped shoulders. When he initially threw his and Ayn Rand's support to the unaffordable Bush tax cuts for the wealthy, he quickly realized there was no way to pay for them. So he had the Fed let the housing bubble "froth" up to generate the phony economic activity and tax revenues which resulted, to try and pay for his folly. The housing bubble arose as a product of almost criminal political decisions by the Fed and Greenspan.

Matt wrote, But if there's too much focus on the "housing" bubble, people might start thinking about the dynamics involved, and realize it's a land bubble.

I doubt it. Approximately three generations of economists have been trained to misunderstand, or ignore, the fundamentals of land economics.

Dean is an example. While I have great respect(*) for him---personal integrity and intellect---a comment he made awhile ago on this blog implies that he, too, doesn't understand land economics. (Something about goods like running shoes and t-shirts become cheaper over time, why not housing?)

----------------
(*) I should respect Dean, since I owe him: his claim that the stock market was overpriced on fundamentals in the late 1990s motivated me to liquidate most of my equity mutual fund holdings, a few months from the peak of the tech bubble.

To: DyinglikeFlies

yes indeed my post left out a lot. I just extracted a couple of his remarkable quotes in the 4/8/08 FT article for posting. ( but I liked what I posted :))

What I hope all bloggers and websites do is comb the past statements of these banksters and looters and nail them to their lies.

With all this country's moving parts, This was the biggest hoax yet in the march of western civilization

Regulations should not be confused with authority. Deregulation was a matter of removing automatic or mandatory regulation and replacing it with authority and discretion on the part of the Fed. For reasons abundantly pointed out by Dean and many commenters (and others besides), officials are prone not to exercise their authority when it is necessary.

Skeptonomist

I am not sure I understand.

Genrally Regulations are enacted via administrative laws.

I am not sure federal employees have any discretion in carrying out administrative laws.

But I might not understand your point.

Evergreen,

Do you think that every regulator enforced every regulation prior to the crash? Then why did we have a crash? Has any regulator ever been held accountable for not enforcing a regulation? Somebody's missing something.

chas

no.

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