This is a dangerous myth. China is still Communist in the worst sense of the word.

A balkanized regulatory structure supported by diverse political interests, led to turf wars which inhibited proper regulatory oversight. Overleveraing and inadequate credit controls were the main factors leading the current crisis.

That Fannie and Freddie were not the cause of the crisis is clear. They are the poster children of all that went wrong. Political interference over their affairs led to improper regulatory oversight. This allowed them to overlever (bigtime) and put too many low quality assets on their books. Twenty % of their assets are sub prime and with their inadequate capital base, they are toast. FHA appears to be walking in their footsteps.

Very little attention has been paid to the role played by investors in all of this. They are as culpable as those who created the investment products. The apparent lack of investment products led investors to reach for yield which the dealers were only too happy to provide. (Complex derivatives are an example here) This was too much money chasing too few goods. Sounds like a form of inflation to me. The causes of this are pretty complex but probably had it’s genesis from the lack of a true consumer led recession in 2001. Most economists (and certainly all politicians) were terrified that with consummers levered as they were, a “real” recession should be avoided at all costs. Mr. Greenspan was only too happy to oblige. And here we are today.

Complex derivatives are a problem as no normal mortal can understand them. This is another example of inadequate regulatory supervision (not to mention management and investor stupidity).

Perhaps this all argues for a benign dictator at the top of the financial pyramid, who will take away the punch bowl at the appropriate time?

Fannie and Freddie were by no means perfect. They lobbied both sides of the aisle heavily and had powerful allies on both sides. They took excessive risks in order to juice returns and therefore executive compensation, knowing that they had an implicit government guarantee. They had a major accounting scandal. But they didn’t cause the housing crisis.

Many top executives are already very comfortable financially, and motivated by a desire for recognition as “great leaders”. Such recognition tends not to go to the leaders who employ sound but conservative strategies. Instead, we celebrate the leaders who in a “visionary” way set a business or a country upon a new path and succeeded. Never mind if it was a crazy risk ex ante.

The government is not without blame on this. The silly ideology of the goodness of the unfettered market far too long dominated even in the Congress. This led to poor oversight and lax regulation of the market. In the end, the government had to intervene to save Wall Street from itself. The alternative would have been a devastating depression.

While the partial nationalization of a number of large companies is clearly a temporary but extreme measure, I would hate to contemplate the situation now if the government had simply taken a hands off approach. Those “purists” who argue for such a hands off approach are clearly living in a fantasy world.

It seems that the Repbublican analysis always wants to say that Fannie/Freddie (democratic darlings to be sure) and their “mandate” to get lower income folks into homes of their own is the real root cause that dwars all others.

Democratic analysis seems to always want to pin the blame on deregulation and a lack of oversight (clipping republican devotion to free markets and smaller government.

The truth is probably both. What disappoints me is when smart folks (like James) fail to incorporate or respond to the best arguments of other positions. If Fannie/Freddie were critical (as Rebpublicans like to say), how can a thoughtful analysis not even addrees them?

Hiring them would be a brave token of America’s willingness to put our economy onto the International regulatory stage. And diverse too!

They’re experienced. They’re rested. They’re ruthless. Go gettem Mr. Obama.

John Donohue
Pasadena, CA

When markers, in terms of these agencies, are present, then all that is needed is to pay heed to those markers and things would be OK. The demand for government regulation arises out of the fact that people do things that are not good for them. Just like smoking. There is a warning sign on the box, but people smoke. However, if there is a ban on public smoking, then only you see a significant effect that really discourages people to smoke.

Warning signs in terms of bond rating are not enough. People need to be sent to prison for violating certain financial rules. Then only, we would see intelligent finance take hold.

John Donohue
Pasadena, CA

And if, as you say in your class, regulators privately despair (54 in the US alone controlling huge institutions not merely US but global in scope), how is any more regulation going to make any difference?

I was thinking about the powers and responsibilities that you mention in regards to the Comptroller and FDIC. Although these agencies have the power to monitor banking institutions, I don’t know where those powers align with their responsibilities. As far as government agencies go, most are underfunded and understaffed. If they have authorities or responsibilities that do not correlate to their primary function, it probably gets overlooked. Honestly, I don’t know if this applies to either of these agencies, but it could explain why their isn’t more done to monitor the banking industry. In some ways its a good thing, since they already have the regulatory power it might be as simple as defining a framework for utilizing those powers and reporting their findings on a regular basis.