After the Bailout

In his excellent article, Bubble Laws, my friend Larry Ribstein notes that the bursting of financial bubbles is almost always followed by new legislation, which typically has the following characteristics:

  • Panic leads to populism which is captured by long-standing interest group pressures

  • “SOMETHING MUST BE DONE RIGHT NOW”—No careful balancing of the costs and benefits of regulation.

  • They fight the last war: Regulators more likely to react to past market mistakes than to prevent future mistakes

  • Post-bust regulators ignore benefits of market flexibility and, therefore, impede risk-taking and innovation

That process has already begun:

Pelosi: “Passing this legislation is only the beginning of our work’’

Frank: “We were the EMTs rushing to the rescue of an economy that suddenly found itself choking, but now we have to perform more serious reform’’

If some legislation is inevitable, what form should it take? Here are some preliminary thoughts:

  • Higher minimum capital ratios for banks and perhaps impose minimum capital requirements on investment banks and money market funds

  • Restrictions on bank and money market fund ownership of market to model assets

  • Break up and spin off Fannie Mae and Freddie Mac

  • Consolidate financial regulators
Posted on Tuesday, October 07 2008 | Permalink

Meh.  The problem is the housing market, not the banks.  How about these:

1. Require 20% downpayment for all mortgages (such amount not to be obtained through a second mortgage or other way around the requirement).
2.  Outlaw ARMs.  Only permit 30-year or 15-year fixed mortgages.
3.  Require much tighter lending standards for residential housing.  Outlaw no-doc mortgages.
4.  Repeal CRA.  If there is a concern about poor people not beaing able to buy houses (and there shouldn’t be, at this point), the government to help poor people directly rather than requiring banks to do anything.

Posted by  on  10/07  at  04:47 PM

Regarding the just passed (as in kidney stone) bailout, I have two questions that I don’t think one idiot in Congress asked.

1.  What were the calculations, estimates and assumptions used to arrive at $700,000,000,000,000.00?!

2.  Exactly, precisely, concisely what in Hell are you (Paulson) going to do with all that money?

Observation:  each member idiot got to put in a page of pork.  Right?

Break up and spin off FNM/FRE.  How?  They either own or guaranty $6.6 trillion in mortgages, CDO’s, CDO-squared’s, MBS, etc.  The taxpayer may be on the hook (a financial term like losing one’s lips) for $3 trillion or more in market flexible loans and related toxic waste.

A.S., They’re more likely to hang the whole Congress (that would be a good starting point!) than repeal CRA. 

Prof., I personally know about 400 active and retired FDIC bank exmainers who, if they had been consulted or had examined national banks, bank holding companies, or federal savings banks would have stopped this outrage in utero. 

Obama addressing the economy:  “Hello, Economy!”

Posted by  on  10/07  at  05:33 PM
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