It is often claimed that the disaster was produced by deregulation. What deregulation you may ask?
Well, mostly, the dismantling of Glass-Steagall. I don’t think dismantling Glass-Steagall caused the crisis, but it is undeniable that if Glass-Steagall had remained in effect, the crisis would have been far less severe, for Glass-Steagall restrained financial institutions from being too big to fail. It was the biggest institutions, the institutions too big to fail, that behaved the worst, and lost the largest proportion of the assets they managed. Glass-Steagall also prevented financial institutions from all being “diversified” in exactly the same way, which “diversification” is not very diverse at all.
So why, and how, was Glass-Steagall dismantled? It was dismantled by being replaced and superseded by Basel II. Glass-Steagall consists of seventeen pages, that a competent person can, with some effort, comprehend. Basel II consists of thousands of pages, no one knows how many, and no one person knows more than a tiny fraction of what is in these thousands of pages.
That is “deregulation”.
If bank regulators, with hubris thinks of themselves as risk managers of the world, and start to dole out risk-weights which determine how much capital a bank needs for different assets, like for instance 8 percent when lending to a small entrepreneur and 1.6 percent when lending to Greece… what in the English language makes most refer to that as “deregulation” and not as simply “bad regulation”?
The real story is that by capital requirements for banks based on perceived risk of default, the regulators introduced regulatory discrimination against those already being discriminated against by the markets, because they were perceived as risky, an regulatory favoring of those already favored by the markets, those perceived as not risky… and then they wonder why the gap between the haves and the have not is widening!
In “The Big Short” Michael Lewis kicks around an idea he has been kicking since the publication of his book “Lair’s Poker” back in the 80’s: that a major source of a lot of the reckless risk-taking is the corporate structure of finance. Incorporation off-loads risk onto the shoulders of shareholders, and limits the risk to money managers. Partners fully liable for their losses would be much less likely to take the sort of risks that money managers now take.
Your thoughts?
In the nineteenth century, the rule in many places, was that banks had to be partnerships, and the partners liable for everything. If the bank goes under, the partners wind up on the street. Where this rule was in effect, banks rarely went under, despite the absence of government guarantees.
The biggest problem, however, was securitization, which has the effect that your mortgage is owned by a faceless crowd far far away. Mortgages should be owned by the bank, and mortgage payments collected by someone who lives and works as close as reasonably possible to the mortgaged house, and the people paying the mortgage, and that man with full authority over the mortgage. the manager of the local branch of the bank. The faceless crowd far far away is bound to get shafted.
Indeed it appears to me that securitization was created in large part to make affirmative action lending possible. Affirmative action required irresponsible and fraudulent lending, so they had to change the system to make irresponsible and fraudulent lending safe and easy.
Ending securitization means dumping Basel II. Everything associated with Basel II has turned out to be criminal fraud. The system is still leaking money in gigantic amounts, implying another gigantic bailout a few years down the line.