Where’s The Ref?

Where’s The Ref?
The U.S. had moved from a state of excess regulation to one of excess de-regulation
Forbes, Sep 12, 2008




The credit crunch. Bear Stearns. The housing crisis. Fannie Mae and Freddie Mac. And as of today, Lehman Brothers, Wachovia and possibly even such august firms like AIG and Merrill Lynch.

These are the bailouts of the past 12 months and the potential bailouts of the next 12 months. The U.S. is experiencing a set of financial crises unlike anything since the Great Depression. It has forced long-held ideologies to be closely re-examined, destroyed enormous amounts of wealth, quashed hundreds of thousands of jobs and ruined the reputations of corporate titans and former Fed chairs alike.

Wall Street is now scrambling, anticipating a sale of Lehman Brothers this weekend. It behooves the reader to consider how we got ourselves into this mess, what possible solutions there are to the current problems, and most important, how we can avoid finding ourselves in a similar situation in the future.

The current headache begins and ends with ideology, namely that of former Fed Chairman Alan Greenspan–an acolyte of Ayn Rand, a free-market absolutist, a true believer in the evils of regulation. Many of the present headaches point directly back to the decisions made by the Greenspan Fed. Sure, there is plenty of other blame to go around: an unengaged president, a clueless Congress, a hapless FDIC, a compromised OFHEO, and Phil Gramm–but the biggest and most accusatory finger points directly at Easy Al.

A brief bit of history puts this into some context: In the 1960s and ’70s, the U.S. had developed a serious regulation problem. Oversight by the government had become excessively time-consuming to comply with, terribly complex and quite costly. When Ronald Reagan became president in 1981, he started a process of eliminating red tape and excess regulation. For the most part, this was a good thing. It made the cost of doing business cheaper and allowed new start-ups to flourish and businesses to grow.

But there are some rules and regulations that serve a valid purpose. These went out along with onerous costly ones. It only took a few generations–or about 75 years–to forget the lessons of the Great Depression. The Glass-Steagall Act was repealed, allowing brokerage firms and banks to once again merge. Free-market deregulation became a misguided rallying cry of ivory-tower neo-con ideologues.

The U.S. had moved from a state of excess regulation to one of excess de-regulation.

Somewhere along the line, too many people forgot that an ounce of prevention is worth a pound of cure. Reasonable capital requirements? Who needs ’em! Leverage limitations? Forget it! Enforcement of lending standards? Not here in America! And all these misguided attempts at allowing the markets to police themselves have come home to roost. The clean-up for this is going to be expensive. We still have no idea how many trillions–yes, that’s trillions with a “T”–this is going to cost.

When confronted with a great evil in World War II, the U.S. put ideology aside and pragmatically set about saving the world. We need to revisit that attitude and start focusing on real solutions to complex problems–and not academic theory or zealous beliefs. They have had their run, and it’s over.

Now comes, we hope, a more intelligent and pragmatic form of supervision and regulation. We don’t allow the Super Bowl to be played without referees on the field. We know that players would give in to their worst impulses: Roughing the quarterback, steroid use, face-mask pulling, abuse of amphetamines. We should treat our financial system with the same measure of common-sense rules and oversight as we do our sports–or prepare to be on the hook for even more multi-billion dollar bailouts.

The choice is ours.


Barry Ritholtz is CEO of Fusion IQ, a quantitative research firm, and author of the forthcoming book Bailout Nation, to be published by McGraw Hill in fall 2008. He writes the daily Big Picture blog

Print Friendly, PDF & Email

Posted Under