To return to Frank’s quote: What deregulation, exactly contributed to the meltdown? And, more important, what regulation would have prevented it? The congressman didn’t answer those questions, because he doesn’t need to. The point back then (the quote is from March 2008) was to lambaste the Bush administration.
Fair enough; he’s a politician, that’s what politicians do.
But Johnson and Kwak ought to go much further. To their credit, they trace many of the problems in the American banking sector back to the Clinton administration. And they admit that regulatory policies remained mostly unchanged from Clinton to Bush and remain mostly unchanged today under Obama.
But the authors are enamored with the idea of using “regulation” to fix the banking system. “If the problem is simply and clearly stated—establish limits such that no bank is too big or too important to fail—it can be solved by people with access to the right data about the financial system,” they write in their book’s final chapter.
So how big would be too big to fail? “This will require a technical formula that goes beyond the scope of this book,” they write.
Ah. They do note, however that “the limits should be set by Congress, with sufficient expert input, and then enforced by regulators.”
But there’s no reason to assume members of Congress would be able to understand financial markets or make smart decisions. See Frank’s quote above, or any of the 2,000-plus page bills that lawmakers have foisted on Americans in recent years.
Further, Johnson and Kwak undermine their own argument. “The idea that we can simply regulate large banks more effectively assumes that regulators will have the incentive to do so, despite everything we know about regulatory capture and political constraints on regulation,” they write.
Yet, oddly, their answer would be to give more power to regulators and lawmakers. Good luck with that.
In a world where lawmakers and regulators had perfect information, it’s possible that they could design a flawless system to oversee financial markets and protect consumers. Of course, if they had such perfect information, they’d probably leave their government jobs, trade based on it, and make a fortune.
Here in reality, the free market is the answer. It isn’t perfect. Nothing is. But, like Guantanamo Bay, it’s the best possible answer to a difficult problem.