Sunday, September 19, 2010
perspectives
If you ask what caused the current financial breakdown you will generally get two answers: deregulation and subprime mortgages. If you ask which was the more important problem you will still get two answers: those generally tending to the left will say deregulation those generally tending to the right will say subprime mortgages. Is this an objectively answerable question and if so where do you go to find that answer?
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Let me throw in 1 more concept. CONTROLS. While fiscal conservatives generally chafe at regulations they are generally in favor of controls. The difference between regulations and controls is as basic as the difference between cash flow and revenue. Regulations are broad general rules that we all must follow. Controls are things we put in place to prevent bad things from happening. For example most businesses have external auditors as a CONTROL against potential abuse by their internal auditors.
ReplyDeleteSo here is how this fiscal conservative sees ONE of the root causes of the meltdown.
Regulation – In 1997 the Feds told banks that unless they made more loans under the CRA they could lose their FDIC insurance.
Consequences of the regulation – Banks made subprime loans, lots of subprime loans, no banks failed (immediately) so they made more loans, buyer qualifications for loans were reduced or eliminated, Wall Street bundled the subprimes and sold them as packages, they devised derivatives, and on and on – and they did so, obviously at this point, without adequate CONTROLS.
So here is my root cause analysis - 1. A well meaning REGULATION was put in place without ADEQUATE controls. 2. Consequences of the regulation and lack of controls were ignored to the point of failure.
I will add that there were at least 2 serious attempts to put controls in place that were defeated politically, but that is another story.