- Kerry warns of ‘very serious’ response to Crimea-Russia alliance
- Fla. Rep. Alan Grayson’s wife drops restraining order against him
- McDonald’s lawsuits filed over wages ‘stolen’ like Hamburglar steals Big Macs
- HUMPHRIES: Fight like a Democrat – An open letter to Sen. Mitch McConnell
- Florida board member shocks with ‘Heil Hitler’ salute at town meeting
- Bill O’Reilly, Chris Matthews inducted into Irish America Hall of Fame
- Military given ‘execute order’ by Obama for secret cyber mission in June
- College group’s diversity event canceled after excluding white people
- Cops: 2 shoot up heroin as kids play at McDonald’s
- Drug charges against husband of Va. daycare owner
BLANKLEY: Placing our faith in economic oracles
One of the sadder categories in the history of human misfortunes is the list of those things that are obvious, but wrong. By definition, if something is obvious, most people agree with it, and thus, it is likely to win the day - but lose the verdict of history. The Earth is flat - obviously. The sun rotates around the Earth - obviously. What we need is a financial systemic-risk regulator who can spot an impending systemic financial risk - and stop it. Obviously?
Unfortunately, save for a few Republican senators and outside experts, it is obvious to most of official Washington that, as Sen. Christopher J. Dodd’s Banking Committee gets ready to mark up the financial regulation bill, only the form that a financial systemic-risk regulator should take is seriously in dispute.
What could be more obvious than the lamentable fact that the economic crisis occurred because our regulatory mechanisms failed in 2007-08 to spot the impending financial crash? And that the failure occurred because no one was looking at the entire financial system - only individual pieces of it? If some regulatory body had been looking at the entire system, the danger could have been spotted and corrected. So, obviously we need a systemic-risk regulator.
But what do we mean by systemic? All American banks? All American financial transactions? All economic activity in America? No, in a globalized economy, the system in question is the entirety of global financial activity - and all other economic activity that might affect financial decisions. In other words, the system is the entire global economy. My, my, that is a lot even for a building full of Ivy League economists to fully comprehend. If they could, they would be in business making trillions of dollars.
For instance, Iceland had a systemic crisis last year because some loan officers in Florida and elsewhere authorized loans to unqualified borrowers, and then thousands of such loans were bundled together by Wall Street investment banks and sold as reliable investments to banks all over the world - thus starting a process that undermined Icelandic banks.
The next systemic financial crisis might happen because the Chinese Communist Party decides - for geopolitical rather than financial reasons - to order the immediate sale of all China’s U.S. Treasury notes. Or perhaps it will be caused by Britain getting into - and losing - a war with Argentina over oil in the Falkland Islands that results in the collapse of the British pound, which reverberates around the financial world.
Or, to be more prosaic, the next systemic failure may result from a failure to recognize that what looked like a healthy increase in the value of information technology stocks, or real estate, or green technology stocks was really a bubble - which burst.
Or perhaps the next systemic failure will result from American banks being too cautious in their loan policies, resulting in a slow-motion collapse of small business - which usually creates about two-thirds of all new jobs - thus causing so many bankruptcies and skyrocketing unemployment that most American banks fail also.
Or perhaps hedge funds will be so closely regulated that their investments yield less than 8 percent - resulting in their primary clients - pension funds - not being able to deliver the full, guaranteed value of pensions to 50 million retired people. The resulting national panic might cause a systemic crisis of confidence in our economic system, followed by riots and economic collapse.
How likely is it that the 300 statisticians and economists working for the new systemic-risk regulator would catch any of these - or an infinite number of other - possible systemic risks? Well, you might say, we wouldn’t be worse off than we are now - so it’s worth the effort.
But the purpose of the proposed systemic-risk regulator is not only to spot the impending systemic risk - but to intervene to prevent it from happening. Consider the power such a regulator would have. Consider that the existence of such a regulator would increase moral hazard - as it would be assumed that if the systemic regulator isn’t warning of danger, market players would be more likely to assume risk is low. And consider the consequences of using such power mistakenly.
For example, let’s say the regulator spots what he believes is a dangerous national real estate bubble. He acts quickly to snuff it out by raising interest rates or requiring minimum 40 percent down payments or some other intervention. What was a booming economy with 3 percent unemployment turns into a hard recession with 8 percent to 10 percent unemployment.
But later it is determined that it was not a bubble, but rather the beginning of what would have been a steady, healthy increase in value. Imagine if such a regulator had existed in 1955 and snuffed out the great post-World War II expansion that made America a prosperous middle-class nation of homeowners in suburbia rather than poorer renters in the city.
It is not given to the smartest people in the world the capacity to see the future, to discern with sufficient precision the details of the moment that cause the critical consequences in the future.
But it certainly is the lamentable history of man that we have the power to screw things up all the time. Remember the vaunted Japanese industrial policy of the 1970s that was going to permit Japan to shrewdly dominate the economic world over us hapless free-market countries with no governmental power to identify the industries of tomorrow?
About the Author
TWT Video Picks
By Emily Miller
Obama is losing the debate on gun ownership, concealed-carry permits
Get Breaking Alerts
- USS Kidd sent to Indian Ocean after 'indication' of Malaysian jet crash
- Oil rig worker says he saw missing plane go down: report
- F-35 secrets now showing up in Chinas stealth fighter
- Cops: 2 shoot up heroin as kids play at McDonald's
- U.S. pilot scares off Iranians with 'Top Gun'-worthy stunt: 'You really ought to go home'
- MILLER: Law enforcement realizes good people with guns deter crime
- Details on ships, planes searching for missing jet
- GOP bill tries to pull courts into fight with Obama on executive power, enforcing laws
- College group's diversity event canceled after excluding white people
- NRA shirt gets N.Y. high school student suspended
Recent Letters to the Editor
- LETTER TO THE EDITOR: Wind power less harmful to wildlife
- LETTER TO THE EDITOR: Constitutional rights are God-given
- LETTER TO THE EDITOR: Clinton still too inexperienced for presidency
- LETTER TO THE EDITOR: The recipe for Asia-Pacific stability
- LETTER TO THE EDITOR: Obama delivering on 'flexibility' vow to Moscow