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24 Nov 09

How Little We Know

Russell Roberts argues against giving more power to regulators for the purpose of reforming capitalism. Regulators were part of the problem, and there is no reason to believe they will be wiser in the future.

www.invisibleheart.com/How%20Little%20We%20Know.pdf - Preview

regulation moral hazard financial crisis bailout mortgage housing government politics economics Russell Roberts pdf

05 Nov 09

Financial Market Reform: Why new regulations must avoid moral hazards

reason.com/...financial-market-reform - Preview

finance crisis regulation moral hazard government politics Jeffrey Miron

According to perceived wisdom, the root cause
of the 2008 financial crisis was excessive risk-taking, and
proper regulation can detect and prevent such excess in the
future.
The Financial Crisis of 2008 did not occur because of
insufficient or ill-designed regulation. Rather, it resulted from
two misguided government policies.

The first was the attempt to promote homeownership.
7 more annotations...
- The pressure to expand risky credit was especially problematic
  because of the second misguided policy, the long-standing
  practice of bailing out failures from private risk-taking. This
  practice meant that financial markets expected the government to
  cushion any losses from a crash in mortgage debt. Thus, the
  historical tendency to bail out creditors created an enormous
  moral hazard.
- any mistakes made by a powerful,
  centralized authority have a magnified impact because they
  distort the behavior of the entire market.
- under the proposed system, bank holding
  companies would forever more regard themselves as explicitly, not
  just implicitly, backstopped by the full faith and credit of the
  U.S. Treasury. That is moral hazard in the extreme, and it will
  create an unprecedented incentive for excessive risk-taking by
  these institutions.
- The only way to limit financial panics is to eliminate
  government-induced moral hazard, and that means letting failed
  institutions fail.
- Rather than being a cause, Lehman’s failure was merely the signal
  that time had come for the U.S. economy to pay the price for all
  the distortions caused by the misguided policies toward housing
  and risk. Given those distortions, a massive unwinding and
  restructuring was necessary to make the economy healthy again.
- The announcement that the Treasury was considering a
  bailout scared markets and froze credit because bankers did not
  want to realize their losses if government was going to bail them
  out. The bailout introduced uncertainty because no one knew what
  the bailout meant.
- The third and perhaps most important way to reduce moral hazard
  is to eliminate the Federal Reserve. As long as the Fed exists,
  it will regard itself as, and be regarded as, the economic
  insurer of last resort.