Question for readers: financial regulation edition


Erik Kain

Erik writes about video games at Forbes and politics at Mother Jones. He's the contributor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.

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20 Responses

  1. Avatar mike farmer says:

    You do it by removing obstacles to credit rating competition. In a free market CRs would compete to give the best, most transparent info to consumers, and that’s all the regulation you need — experts being paid by investors to spot fraud and risky schemes. Politics and corruption will always cloud government regulation. But once a private CR is caught in fraudulent activity, it would break any others from sucking eggs — no one would dare try. But government regulators get a pass when they screw up, probably even promoted.Report

    • Uh. Far as I know, Moody’s and Standard and Poor’s are private rating agencies not government entities. Did I miss the great credit rating agency takeover bill of 2009?Report

      • Avatar JosephFM in reply to Nob Akimoto says:

        Yeah, the problem is that they saw the business they were rating – not the investors – as their clients. They ended up competing on the wrong things.

        Now, one could argue (and I’m guessing Mike would) that this is a result of regulations limiting the number of ratings agencies that could exist, and that if there were dozens instead of just two or three they would function better.Report

        • Avatar mike farmer in reply to JosephFM says:

          Yes, Joseph, that would be my argument — they were hampered by government regulators and restricted competition — they became quais-government agencies.Report

          • Avatar Barry in reply to mike farmer says:

            Well, what I noticed is that it was common knowledge that the rating agencies were paid by the product issuers; this was an obvious conflict of interest. However, I never heard of anybody starting up an agency which would work the other way. It’d have no government-delegated powers, but in theory, there’d have been a good market among people interested in getting good analysis before writing billion-dollar checks.Report

  2. Nob Akimoto Nob Akimoto says:

    There’s several levels of problems in the financial markets, but really the biggest one is there’s a common action problem of biblical proportions. That is: individual actors acting rationally will fuck up the system at a macro level. Most of the time regulation is aimed at individual level activities and don’t account for macro level stress, while things like monetary policy are aimed at macro level activity, hence you wind up with a strange mixture of policies that don’t seem to really fundamentally change how business is done. How do we fix this? Hell if I know, I’m more confused now than when I spent 15 weeks studying the interaction of policy and financial markets.Report

  3. Avatar Barry says:

    Please note that in a ‘free market’, the same phenomenon would occur – the agencies were paid by the sponsors of the items to be rated. It’s highly likely that there would be a race to the bottom, since agencies which were too picky would not find repeat business.

    Now, in a theoretical world, these agencies’ ratings would be considered untrustworthy, which would lead to reputation being valuable.

    However that did *not* occur in our world – when the three big agencies were eagerly stamping an ‘AAA’ rating on any old junk, other parties happily bought it.

    The biggest lesson of the melt-down is that the Econ 101 gliberatarian view of the world is very wrong.Report

    • Avatar JosephFM in reply to Barry says:

      Yeah, for credit rating to work, I think it would have to be done on a case-by-case basis, paid for by potential investors rather than the institutions whose products were being rated.

      Of course, ideally people would know better than to invest in money that is owed by third parties….but yeah that’s not going to happen.Report

  4. Avatar Barry says:

    I’d also add that Matt frequently is a data point in favor of the view that the only benefits to an undergraduate education at Harvard is the networking.

    He’s allgedly a poli sci major, but he’s assuming that capitulation in these negotiations (HCR) will somehow lead to credibility in the next negotiations (financial reform). He’s ignoring the fact that the financial industry has at least as much money as the insurance industry, is at least as aggressive, and has at least as many friends in Congress (and in the executive branch, and in the elite MSM,…).

    He’s also ignoring the fact that the same crew will be just as happy to punk Obama on finance, and that Obama’s walking in with a rep for being punked.

    In short, Matt’s now one of the ‘respectable centrists’ who’s trying to excuse themselves from this defeat.Report

    • Avatar ThatPirateGuy in reply to Barry says:

      The difference is that there is much more anger at wall street than there is at insurance companies. So even if he can’t get it through people will like that he tried.Report

      • Avatar Barry in reply to ThatPirateGuy says:

        Well, the insurance companies were hated, and they gutted the bill down to the point where serious liberals were wondering if it was worth passing, and Obama took some serious hits.

        Wall St has more money, more influence, and far more paid agents in Obama’s higher levels.Report

        • Nob Akimoto Nob Akimoto in reply to Barry says:

          The bill hasn’t been “gutted” and if “serious liberals” are wondering whether or not it’s worth passing, then they’re not very serious people who seem more interested in sticking it private insurers than actually helping people and expanding access.


          Medical Loss Ratios, price spread caps (at 3x? We thought 5x would be a good deal), guaranteed issue, etc. Have always been significantly more important than public competition.

          Now if ANYONE got their wish in the bill it’s pharma, not the insurance companies.Report

        • Avatar Bob Cheeks in reply to Barry says:

          Hey, I heard on that commie, Bill Moyer’s show that between the financial sector and the medical health care/insurance that nearly 3/4 of a trillion dollars has gone to Congress! Could that be right or did I miss hear? Also, Wall St. owns significant numbers of commie-Dems as well and therefor no meaningful regulatory legislation…is that correct?Report

  5. Avatar North says:

    I will refer you to this link:

    Now I don’t adore Volcker unabashedly but he is the slayer of inflation and I happen to agree with him. A great deal of the trouble the banks got into is that their speculative arms were entwined with their commercial arms and the one got the other into enormous trouble. Once they were threatening to fail the entire economy was looking at a crisis. So I think an important place to start would be to look into forcing them separate again.Report

    • Avatar Bob Cheeks in reply to North says:

      Thanks North, I quite agree with you and the piece on Volcker seems logical. I want to accurately understand the corrupt relationship between the financial services industry and the Congress. The congressional prostitutes who facilitated this collapse either for personal gain or political philosophy should be identified and punished.Report

  6. Avatar steve says:

    Just admit that regulatory capture is real. Acknowledge that banks and finance guys will always outsmart us. So, make the banks smaller, simplify regulations. If they fail, let them fail.


    • Avatar Barry in reply to steve says:

      Somebody phrased it this way – banking vs all other activities. Banking is lower risk, lower return, regulated and has government backing and bailouts. The other activities can be high risk, but no bailouts. And the banks must be prevented from going into ‘casino-land’; the desired situation is that those who want to take high risks actually take those risks and don’t pass them on to us.Report