Helmet!
In one of my favorite books, A.J. Jacobs discusses something (I would imagine) all parents have experienced: looking at their child and thinking that they cannot let anything bad happen to them. When Jacobs goes too far protecting his child, drifting into the overprotective realm, his wife stops him with a code word: helmet. (As in, take the bike helmet off the baby, he’s just walking around.) Excesses aside, I suspect that this feeling is one of the up-sides of human nature, and it probably helps to explain how we end up with politicians that can’t stop “protecting” us.
During the financial crisis, one common refrain of the Democrats is that Republicans/George W. Bush deregulated at an alarming rate during his tenure. It’s interesting, though, that very few critics can point to specific examples of these deregulatory actions. Not to mention that these critics seem to have forgotten Sarbanes Oxley, a law passed in 2002, during the last “worst crisis since the great depression.” The truth of the matter is that there is an enormous amount of regulation throughout most major industries in the U.S.
This weekend, the Wall Street Journal ran a piece that points out some specific flaws with the “deregulation” hypothesis, some which I had not yet seen in print. For instance, the article takes aim at the Basel II regulations. Even though these capital regulations were designed for commercial banks, the Securities and Exchange Commission (SEC) tried to apply these to other financial companies during 2004.
The article points out: “One fair question is how such regulation could have allowed Wall Street to employ so much more debt than the commercial banks. Part of the answer is that, instead of a fixed capital ratio standard, Basel II uses mathematical models crunching historical data to determine how risky an institution’s assets are and therefore how much capital it needs. For this reason, when the investment banks switched to Basel II in the middle of a housing boom, AAA-rated mortgage-backed securities appeared almost as safe as cash. Oops.”
Were the Basel II standards the result of good intentions? Perhaps. Regardless, the implementation of Basel II was just another example of government trying to regulate a dynamic market by trying to prevent failure. As painful as it may be, markets work better when participants are allowed to experience both success and failure. Learning what to do is just as important as learning what not to do.
NM
