Outsourcing Mallaby On Financial Deregulation

Sebastian Mallaby:

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University's Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn't been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

Kevin Drum says pretty much what I would have:

First, Phil Gramm's 2000 Commodity Futures Modernization Act (supported, unfortunately, by the Clinton administration) was specifically designed to "protect financial institutions from overregulation" — primarily by leaving the market for credit default swaps completely unregulated. There may be several underlying causes for the credit crisis, but this is surely one of the very big ones.

Second, after the LTCM debacle of 1998, Alan Greenspan (and, sigh, Robert Rubin) produced a report suggesting that we should "encourage," "promote," and "consider" guidelines that might prod financial institutions into reducing their drunken sailor approach to leverage. But they declined to produce actual regulations to that effect. In fact, as I noted the other day, in 2004 the SEC issued a rule allowing big investment banks to increase their allowable leverage ratios. That turned out not to be such a good idea.

Third, there was a bipartisan failure to regulate the mortgage market into a semblance of rationality. Just the opposite, in fact, as lawmakers pressed Fannie Mae to insure ever dodgier loans and Alan Greenspan encouraged Americans to take advantage of ever cheaper mortgage rates.

Plus there was the repeal of Glass-Steagall in 1999 (also Gramm's idea, and also, unfortunately, supported by the Clinton team).

While the Clinton team's fingerprints are definitely present here, there's a big difference between being too spineless or pro-business to stop bad stuff like this, and being the ones pushing it in the first place. Equating the two is like equating Neville Chamberlain and Adolf Hitler.

Shorter Luskin: Americans Only Believe the Economy Is Bad Because Obama and the Media Told Them So

And the Outlook section editor gave the Stupidest Man Alive a pile of space to expand on that thesis, in a piece titled, "Quit Doling Out That Bad-Economy Line."

Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression.

Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that "the entire world is either now locked in a global economic recession or soon will be." Actually, that's a major clue to what started this thought-contagion about everything being the worst it has been "since the Great Depression": Politics.

Patient zero in this epidemic is the Democratic candidate for president.

Numero Uno: People are very good judges about how their own lives, and those of their friends and neighbors, are faring. If they say the economy sucks, it's probably because it sucks for them and for people they know and come into contact with.

Numero Two-o: How "the economy" is doing isn't worth a damn to most people. If their paychecks aren't getting bigger, if gas prices have skyrocketed and food prices are going up, if their health insurance leaves gaping holes and they might lose it if they actually use it for anything major, if they're behind in their payments on a house whose value is plunging, then how 'the economy' is doing is meaningless.

The disconnect between the state of 'the economy' and the statistics that give a clue as to how most Americans are actually doing - let alone the polls that show they think the economy's in the crapper - just shows how poorly 'the economy' serves Joe and Jane Sixpack. Don Luskin and his friends are doing great; what's your problem?

Numero Three-o: according to Gallup, people already thought the economy sucked last winter, when it looked like Hillary would still win the nomination. Kinda hard to blame that on Obama.

There's a whole bunch of other horseshit there, but I'll leave it to the economists in the blogosphere to do a more thorough dissecting of Luskin's garbage. I'll just leave you with one more Luskin quote:

McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession."

Yeah, Americans are just imagining the problems they're dealing with. Snap out of it, America! Just ignore what your household budget is telling you - you're doing fine.

Update, Monday morning: I forgot to quote Luskin's " "Turmoil" in the debt markets? Sure, but we've seen plenty worse" remark. With Lehman in Chapter 11, AIG on the ropes, and the possibility of a pretty serious cascade failure of major investment houses, I think it's safe to say that no, those of us too young to have lived through the Depression haven't seen worse.