Monday, April 4, 2011

Yoda on Dodd-Frank

imagePerhaps Alan Greenspan, at the ripe old age of 85, should be excused for an occasional foraimagey into fantasy land, but his latest screed at (reproduced in the Business Spectator here) can’t pass without comment.

“Dodd-Frank may ruin us all” runs the alarmist banner headline.  It’s not really clear what he mean when he says “us”. Presumably not the millions already screwed over in the financial collapse so ably overseen by Al himself.

A central plank of Al’s criticism is that “The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate.”

I’m not convinced this is true.  It’s bigger, and some of its products are quite complicated, but the basics of the market are unchanged.  Perhaps Greenspan’s failure to regulate the market properly in the lead up to the GFC was a product of this view – that the financial world is so clever nowadays that a system designed to reward people for writing loans that borrowers can’t afford to repay is somehow not a problem.  It doesn’t matter how you re-package those loans or how many times you on-sell them, the basics are quite simple, and it was all very wrong.  So wrong in fact that its simply astounding to see Greenspan continue to oppose those who take a different view from his own laissez-faire approach to financial market regulation.

My problem with Dodd-Frank is a bit different.  If the regulators failed to use the powers they had pre-GFC to put the brakes on the nonsense lending happening at that time, or the more bizarre bank funding mechanisms that were used in some places (e.g. Northern Rock), what use are more regulatory powers?  The missing element seems to me to be the willingness to use the powers the regulators have,  not the extent of those powers.  Remember Sarbanes-Oxley?  Fat lot of good that did!

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