What should Bush have done

There are a whole lot of Democrats in the comments to this post who know that Bush could have and should have stopped this bubble.  They don't know what he could have done, exactly; they're not tricksy bankers.  But they've read, like, one and a half whole articles on the subject, so they're sure that this is the fault of Republican ideology.

I'm so glad that I'm voting with the reality based community this time around.

I interrupt this post to note that thanks to Bill Clinton, millions of people have died of cancer in the last ten years.  It seems to me that if he cared, he could have funded research that would have cured cancer.  What research?  I don't know, I'm not a damn doctor.  All I know is, a lot of people are dying of cancer.

Now back to our regularly scheduled programming.

One of my commenters blames Bush for gutting the predatory lending laws at the state level.  A wicked pundit would note that this is a project near and dear to the heart of one Senator Joe Biden, (D-MBNA).  A less divisive voice would point out that predatory lending laws are aimed mostly at payday loans and credit cards, not housing loans.  The fraud problems in the housing market seem mostly to have been perpetuated by mortgage brokers, who are still regulated at the state level.  The worst problems are in Democratic-dominated California.

Another comment is such a treasure that I must reproduce it in its entirety:

I disagree strongly with McCardle on this one. In the run up to being admitted as an attorney, I spent one summer at the SEC's division of Market Regulation under Donaldson. I was shocked and appalled at the excessive coddling of industry that was standard operating procedure and consequently chose not to return after law school. And as disturbing as practices were then under Chairman Donaldson, an industry insider appointed by Bush, the situation deteriorated even further after he was pushed out in favor of the ham-handed Republican ex-congressman Cox. The ideology of achieving "small government" by reducing or eliminating regulatory oversight is a pandemic throughout Washington and state government. The current meltdown is a direct consequence of the lack of oversight combined with the effect of Gramm Leach Bliley stripping all remaining profitability out of the basic business of banking, leaving only leveraged speculation as a possible source of income. Much the same can be said about lack of oversight causing the run of crude from $60 to $147 under Wendy Gramm's CFTC -- a surge inexplicable in terms of supply and demand fundamentals but entirely accounted for by the combination of 1) oil traders taking control of Cushing oil storage facilities 2) the subsequent reporting of false inventories 3) profiteering from highly leveraged positions 4) a complete lack of transparency into speculation via massive swap positions with investment banks and 5) an influx of highly leveraged momentum investors.

Of course the best part of all of this is that the cash (please recall all those budget surpluses under Clinton) that might have used to bail us out of this mess has been more than entirely squandered on or embezzled via the the occupation of Iraq. But lacking the funds to manage an orderly resolution of the mess, the entire country will suffer through a prolonged and uncertain period of reduced economic growth (or recession), currency depreciation and attendant inflation, diminished foreign investment, individual anxiety arising from lack of confidence in banks and the FDIC, and depleted international prestige. These effects aren't the consequence of "the invisible hand" they are the consequence of a philosophy of government that derives from the elegant yet fictional universes crafted by the likes of Ayn Rand, Milton Friedman, Myron Scholes, and Robert Merton rather from the reality that the rest of us live in.

I infer that you're proud of your Chicago MBA, but Megan, the paper is worth more as kindling.

This is a first class example of what I like to call "Supertwaddle":  thoroughgoing nonsense wrapped up in just enough technical knowledge to be more thoroughly, amusingly wrong than the ordinary twaddle you buy at your local drugstore or neighborhood bar.  Sadly, it often sounds very convincing to people who a) have no idea what any of the jargon means and b) badly wish to believe the twaddler.

We start by asking what beefier SEC enforcement was supposed to do to portfolios and banks that were in full legal compliance with the SEC rules until the subprime market collapsed.  Aside from standing there with their superdetective tweezers and magnifying glass in hand, clicking their tongues and saying, "That looks like it might be infected.  You should get it looked at."

As an aside, we point out that the more lightly regulated hedge fund industry is weathering this storm better than the more heavily regulated banks.

Then we move on to Gramm-Leach-Bliley, bugbear of Glass-Steagall nostalgists everywhere.  We first observe that GLB passed under the Clinton Administration.  We second note that it passed in 1999, too late to have had any effect on the stock market bubble.

Then we pass into la-la-land, where we try to figure out which of the provisions of Gramm-Leach-Bliley created any of the major contributing factors to the current crisis:

  • Steadily rising prices in the housing market
  • A flood of foreign capital flowing into US debt markets
  • A conviction among ordinary Americans that housing purchases were an easy, and possibly even quick, way to get rich
  • A 20 year government committment to ever-expanding homeownership
  • A global shift towards increasingly exotic financial instruments for pricing and distributing risk
  • Resistance in the Democratic controlled Senate to the Bush administration's 2003 attempt to put some teeth in OFHEO (which regulated Fannie and Freddie)
  • Lunatic bankers who confused beta with alpha.

It didn't even do the one specific assertion he makes, which is that it made ordinary banking unprofitable; that took place earlier in the 1990s, and had to do, as far as I know, with two unrelated factors:  internet competition for trading commissions, and the rise of Regulation FD, which made it basically impossible to make money off your market research division.

Even more bizarre is his contention about oil.  Oil is a fungible commodity priced on world markets.  Local regulations have at best extraordinarily trivial effects on its price, unless your government controls a very large source of supply; the traders simply take their business to another exchange.  Even the Arab oil embargo of the United States had basically no effect on US prices.

My Chicago MBA may not have taught me everything, but somewhere along the way I did learn not to opine on legal matters based on my one summer as a paralegal.

Brooksfoe, ordinarily one of my favorite commenters, admits he doesn't know enough about finance to get specific, but he's nonetheless very sure that the Bush administration could have stopped this in his tracks.  As evidence, he points out that there have been analysts urging Bush to do just that.

Okay, let's explore this.  What those people were talking about, by and large, was the easy credit provided by the central bank, over which Bush has no direct control.  During both speculative booms, there were people who thought that the markets were in a bubble, and that Greenspan/Bernanke should have acted to shut it down.  But prior to the actual crashes, those people were in a minority.  The considered opinion of Robert Shiller, probably the greatest living expert on bubbles (and a Democrat) is that any Fed or regulatory action would have had at best marginal effect on the housing bubble--or at least so he told me when I interviewed him. 

The problem is that we think we know what to do to pop bubbles.  What we know how to do is to make it very, very difficult to borrow money. (The reason I say we think we know is that when foreign capital is involved, it gets complicated--the Fed raised interest rates on margin loans in 1929, but that just attracted more lenders).  The problem is, if you do this whenever you might be in a bubble, you will throw a lot of people out of work unnecessarily.  And if you wait until it's clear you are in a bubble, you will have to raise interest rates high enough to throw really a lot of people out of work.

At that it might not have worked; there was so much long term capital flowing into the US from abroad, eager to lend to Americans, that it might have required shutting the economy down to reverse the flood.  Arguably, our budget deficits actually helped the problem by soaking up some of that excess capital.

At the Federal level, we might have forbidden securitization, or more exotic instruments.  But this wasn't even on peoples' radar before the subprime market went sour.  The bank regulators could probably have done something to tighten lending standards, but this would have amounted to saying "Don't lend money to poor people".  A Democratic congress saying "don't lend money to poor people".

Obviously, in hindsight we wish we had done this.  And in hindsight, I wish I'd played the winners at the track last weekend.  The things that might have worked were not among the solutions that were being proposed at the time. The only thing a Democrat could obviously have done differently, other than dial the psychic friends' network for economic advice, was appointed a more hawkish Federal Reserve Chair--one who was willing to tolerate higher unemployment in return for lower inflation.  That's exactly the opposite of normal Democratic policy direction.

Democrats seem unable, or unwilling to grasp, that to the extent that this is a regulatory problem, the seeds were laid under Clinton, not Bush.  There simply haven't been any significant financial regulatory changes over the last eight years that we can point to as the culprit; nor does "stronger enforcement" work as the solution to a crisis when the companies in trouble seem to have been in full compliance with the law.

And these are the good comments.  The rest are ordinary twaddle--and not even good twaddle.  Stale twaddle that's been sitting around on the back of the shelf for six months.