Thursday, March 27, 2008

First Thoughts on Garbo's First Post

Garbo writes "During times of plenty, perhaps we do not need such regulation, but without it how can we prevent the slide into recession or depression?"

During 'times of plenty' is precisely when we need regulation the most. Those are the times when bubbles form, when people begin to believe "No, this time its really different. Technology/ new management techniques/ globalization/ insert-new-buzz-word- here has changed whats possible." Those are the times that lead people to write books with titles like Dow 36,000: The New strategy for Profiting from the Coming Rise in the Stock Market, written right before the dot-com bubble burst (FYI, the Dow Industrial Average peaked at around 14,000 last October,and, as of now, is back to about 12,000); or Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade - and How to Profit From Them, published in 2005 (and updated in 2006, with the new, perhaps even less prescient title, Why The Real Estate Boom Will Not Bust - And How You Can Profit From It.)

It was precisely this type of "irrational exuberance," to borrow Alan Greenspan's description of the dot-com boom, that oversight and regulation of financial markets is meant to curb. Remember the words of William McChesney Martin, Chairman of the Federal Reserve under Truman through Nixon: The job of the Fed is to "take away the punch bowl just as the party gets going."

Lastly, as of yesterday, it seems Treasury Secretary Henry Paulson has come around to the same view, saying that "This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions. These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability." He also said, of giving companies such as Lehman Brothers and Bear access to the Fed's funds, that "Certainly, any regular access to the discount window should involve the same type of regulation and supervision [as the fed has over commercial banks]."

UPDATE: Apparently I may have misread those statements by Paulson. The NY Times puts them in a different context than the above articles.

1 comment:

Garbo said...

Thank you for expanding upon my post. You are absolutely correct that times of plenty are exactly when caution and regulation are most required. Your post brings to mind an argument from the Glass-Steagall debate spoken by Rep. John Dingell, Sr. (D-MI), the father of the current Rep. Dingell. On May 22, 1933, he declared, “I believe that the myopic banker as an adviser should receive about as much consideration at the hands of the House as a braying jackass on the prairies of Missouri. They proved by their inability to maintain their own business that they have absolutely no right to advise the House as to what course we should follow.”