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What regulations do you think would possibly fix this situation?

New York's Wall Street; AP Photo

Question/Comment: I’m concerned that your viewers are going to come away from this discussion thinking that the market is to blame.

The risky investments you refer to at the root of this problem were ones that the government mandated, ones that politicians had repeatedly urged banks to take. Give loans to people who might not be able to afford them. Don’t verify income. To say that it was a lack of regulations that led to this problem is to ignore the rules learned from the problems of the first half of the 20th century.

What regulations do you think would possibly fix this situation? And could you assess a few of those who disagree with the need for regulation?

Paul Solman: Do you mean that Fannie and Freddie caused this mess because Congress tried to get them to promote home ownership?

Well, they didn’t help matters any by jumping on the subprime bandwagon, but the fact is, they didn’t CAUSE the housing bust. Here’s a fact: their market share in the mortgage market was going DOWN until last year. They had been steering CLEAR of exotic, dodgy mortgages.

Look, any fool knows how difficult it is to get regulation right. It’s a constant cat-and-mouse game between the lower paid, bureaucratically-hands-tied, often politically influenced regulators and their loosy-goosey, better paid (and thus highly incentivized) regulatees. Check out the piece we did a while back on why we didn’t catch the Enron guys.

That said the deregulation-at-fault argument is a slam dunk. Mortgage origination fled the banking sector because of the ten percent reserve requirement, a requirement of REGULATION. See our subprime primer and especially the bit with the bank examiner in the Jimmy Stewart “It’s a Wonderful Life” excerpts.

More to the point, what about these (astronomical? mind-boggling? vertiginous? meta-galactic?) side bets known as credit default swaps? We’ll try to explain them in an upcoming piece on the NewsHour, not here. But suffice it to say that notorious AIG is on the hook for such bets to the tune of $465 BILLION. You read that right. One company, with touchy-feely TV ads, and nowhere NEAR the capital to cover such bets.

Had they been regulated, they would never have been allowed to make them. But as I’ve written here before, they were classified as “derivatives” instead of what they functionally were – insurance against defaults – and specifically exempted, BY LAW, from regulation by Senator Phil Gramm back in 2000, in a last-minute rider to the annual appropriations bill.

Can regulations now FIX the situation? Who knows. But you’ll notice that Hank Paulson and Ben Bernanke sure think we need them. The main thrust will be oversight of the risk taking by financial institutions, something we’ve understood the importance of since the 1930’s, for goodness’ sake. And much narrower tolerance for the kind of hyper-leveraged bets investment banks in particular were making. They put us all at risk, Peter: serious risk. Plus, we pick up the tab.

Would you let your kid, say, bet billions of your money without overseeing her?

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