Tyler Cowen’s NYT column today, Where Politics Don’t Belong, comes perilously close to the mark in identifying the key problems of the bailouts: They encourage a reliance on special Government dispensation, regulatory exemptions and taxpayer handouts:
“FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.
Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors, which had been practiced numerous times, including the precedent of Long-Term Capital Management in 1998. Without these mistakes, the economy would not have been so invested in leverage and real estate and the financial crisis would have been much milder.”
Beware conflation of cause and effect: We need to separate the various elements that led to the crisis — radical deregulation, misplaced compensation incentives, rampant banker excess — with the unconscionable transfer of taxpayer wealth that followed. Unfortunately, the column seems to conflate the idea of government intervention as the same as regulation — that the bailouts are somehow the same as the radical deregulation that allowed the banks to run wild.
But Cowen is right about this much: The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends; They asked for and received special treatment. This is a unique dispensation that almost no other businesses have enjoyed — certainly nowhere near the degree the finance sectors has received. Instead of earning their way via market place competition, these financials were uniquely treated in terms of regulation, legislation and tax policy.
Indeed, many people still seem wed to the wrong belief — it was not too much regulation that caused the problems. Rather, it was the special exemptions from regulation that in reality led to the crisis. From leverage to derivatives to lending standards to interest rates, the government acquiesced to the wants of the banking sector.
Consider the conclusion this leads to: Recognizing that these institutions require oversight, that they cannot be given special regulatory exemptions, or allow their lobbyists to push their legislative agenda on the public, with the taxpayers footing the massive cleanup bill when it all goes wrong.
Banks cannot be left on their own — again — lest they blow up the world — again.
Where Politics Don’t Belong
NYT, September 13, 2009
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