Robert J. Samuelson
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Jun 18, 2009 03:11 PM
In the elaborate roll-out of its proposed overhaul of financial regulations, the one thing that President Obama, Timothy Geithner, and their economic advisers have not done is explain how their recommendations--if they had been in place four or five year ago--would have prevented the present financial and economic crisis. There are skeptics. Gary Gorton, a professor of finance at the Yale School of Management, is one. "Only if you were in the market trading [suprime mortgage securities] did you see it coming," says Gorton of the period before August 2007, when the crisis surfaced. "I don't think you can legislate foresight."
The history of the crisis suggests some skepticism. By early 2007, delinquencies and defaults on subprime mortgages--which had been well below the radar level of most government officials and economists--were beginning to attract attention, as was the deepening slump in housing construction and the incipient decline of home prices. Still, Federal Reserve chairman Ben Bernanke testified before Congress that housing's problems seem to be contained and probably wouldn't lead to recession--never mind the worst financial crisis since the Great Depression. Most economists agreed. With a few exceptions, economists, regulators and bankers expressed little alarm or apprehension about an impending financial collapse.
On paper, it's possible to argue that the Obama proposals might have prevented the crisis. One propsoal is that issuers of "securitized" bonds--consisting of underlying loans for home and autos, for example--would have to hold a percentage of the bonds in their own portfolios (the amount is unspecified but is thought to be about 5 percent). If that rule had existed, underwriters might have rejected some "subprime" mortgages as too risky. Had the proposed Consumer Finance Protection Agency been in existence, it might have issued mortgage rules and disclosures that also would have prevented some of the riskiest loans. Finally, the Obama proposals include authority for the government to lend to financial institutions whose failure might disrupt the entire system; if that had existed last Sept., the government might have rescued Lehman Brothers, whose failure sent shock waves through the global financial system.
Against that stylized story lies what actually happened in the 2003 to 2006 period. Interest rates were low; so were delinquencies on most mortgages; the home-ownership rate was edging up. Bankers, borrowers and politicians were all pleased--the housing boom was a bright spot in the economy. Is it likely that regulators would have curbed the boom?
But just because the proposals might not have prevented the crisis, that's not an ironclad argument against them. In general, the proposals would give both the Federal Reserve and the Securities and Exchange Commission more power to ask for more information from financial institutions, including hedge funds. Capital requirements for banks and some other financial institutions would be increased. Trading in many derivatives (such as Credit Default Swaps) would be directed onto exchanges and clearing houses, where financial responsibility is more dispersed and more information is available. Risk can't be purged from the system, says one Administration official. "You've got to make the system a little safer for ignorance and failure," he says, "because we're going to have ignorance and failure."
Katie Paul
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Jun 18, 2009 11:52 AM
I love the story about Argentina's mysterious shortage of coins, or monedas. It's a fun little tale about a bizarre trend, complete with quirky subplots; governments fudging inflation data, coin-rich metro bus companies, which only accept payment in coins, supporting a whole moneda black market. In fact, I love it so much I wrote an article on the matter back when I was reporting out of Reuters' Buenos Aires bureau--and battling with just about every cashier in the city to ensure I had enough coins to take the bus home each day. But that was two years ago. Since then, we've heard from Slate (Yes, We Have No Monedas), Global Post (Where Are Argentina's Coins?), Time (Spare Change? There's None In Buenos Aires), the AP (Argentine Inflation Means Daily Scramble for Coins), and The Wall Street Journal (Argentina Is Short of Cash -- Literally), to name a few. Then last week, The New Yorker's James Surowiecki chimed in (Change We Can't Believe In) on the matter.
Basta! I'm calling it: this story has officially jumped the shark. Apparently, Argentina agrees with me. Today, news comes via the Buenos Aires Herald that the government is finally introducing an electronic ticketing system for trains and buses. If all goes according to plan, people will no longer feel compelled to hang onto their coins for dear life (or, for that matter, grumble about the government's absurdly rosy inflation figures, since inflation may play an underlying role in the coin dilemma...). Argentina and its monedas will live happily ever after.
Maybe it'll work, maybe not. It's possible (likely) that inflation and the mint are far more to blame than the bus system. But even if that's the case, this should make enough of a dent to alleviate the worst of the coin fiasco--and thereby eliminate the need for every foreign correspondent to write about it. So at long last, Argentina watchers will have to find some new flap to track. Fortunately for us, there's rarely a dull moment in Argentine economics, where fiscal disputes tend to play themselves out in the streets amid burning tires and clanging pots and pans. My pick would be this: because of President Cristina Kirchner's controversial farm policies, Argentina--a country so cow-obsessed that its grandest high-society event is an annual livestock fair--is now going to have to import beef for the very first time. Ever. Now, that's not just a shortage--that's an identity crisis.
Katie Paul
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Jun 18, 2009 07:58 AM
To Devalue or Not to Devalue: That is the question in Latvia, which is facing the worst recession in the former Eastern bloc. So far they're not devaluing their currency; it's risky, but if it works, it could set a powerful precedent for other small, struggling economies.
Uncle Sam $68 Billion Richer: Ten of the nation's largest banks paid back portions of their TARP money yesterday.
BRICs Still Down with Dollars: Remember that whole spat about the demise of the dollar as the global reserve currency? Whole lotta nothing. BRIC leaders met in Russia this week, but were unable to come to an agreement on a call for a shift away from the greenback.
The Warm Cozy Capitalist Manifesto: Did you like NEWSWEEK's cover story this week? The Atlantic's Derek Thompson was not so into it, arguing Fareed Zakaria should rationalize less and criticize more when it comes to financial follies. In the name of the free exchange of ideas, we at the WON blog encourage you to weigh both views.
