Commentary by Caroline Baum
May 15 (Bloomberg) -- Economic historians like to put some distance between themselves and the events they’re writing about. The Founding Fathers come up for a scholarly re-look a few times each century. The Civil War and the economics of slavery provide endless fodder. The Great Depression is still hotly debated 80 years after the fact.
With any luck, by 2088 we should have a good handle on the Panic of 2008: the causes, cures and curiosities surrounding the subprime collapse that was heard, and felt, ‘round the world.
What will the current crisis look like when viewed through history’s telescopic lens? We can only imagine.
Systemic Risk Regulator R.I.P.
The U.S. Congress, which excels at preventing the last crisis from recurring, enacted new rules and regulations before the last bank had extricated itself from the government’s grip.
Regulation was deemed too important to be left solely to the regulators. So Congress vested authority in a Money Czar to ferret out financial instability wherever it might roam.
The notion of a systemic risk regulator fit right in with the country’s post-crisis czarism fetish. Like all czars, this one was doomed.
The post-mortems after the crash of ‘29 -- that’s 2029 -- went something like this: A single regulator is poorly suited to identifying systemic risk. The chances are much better that a patchwork of regulatory agencies, maligned after the Panic of ‘08, will spot something a centralized authority missed.
Glass-Steagall-Gramm-Leach-Bliley-Dodd-Frank-Pelosi
The 1933 Glass-Steagall Act, which separated investment banking from the more staid commercial banking, was repealed in 1999 by Gramm-Leach-Bliley.
A decade later, members of Congress determined that deregulation was the proximate cause of excessive speculation in the financial services industry. The de-leveraging that followed turned an ordinary recession into a worldwide meltdown.
Under the sponsorship of Senate Banking Committee Chairman Chris Dodd, House Financial Services Committee Chairman Barney Frank and House Speaker Nancy Pelosi, lawmakers gave new meaning to the separation of powers. Instead of just separating investment banking and brokerage activities from commercial banking, Congress took the investment out of banking.
The new business model of counting coins and making change wasn’t nearly as lucrative as debt securitization. But never again would the nation have to contend with the fallout from excess leverage.
Swaps, the Old-Fashioned Way
Following the Panic of 2008, Congress enacted all kinds of restrictions on executive compensation.
And not just for financial institutions. Corporate executives nationwide saw caps placed on their comp, with the government providing detailed formulas for determining how much executives could earn.
For example, directive 16-717 dealt specifically with the chief executive officer. “The compensation of the CEO shall not exceed 0.6 percent of the square root of the corporation’s average profits for the last 10 years adjusted for one-time charges,” according to the directive. “Under no circumstances shall the CEO earn more than 10 times the median compensation of the company’s full-time employees or 20 times the compensation of the lowest-paid full-time employees.”
Maybe you can guess what happened.
The post-agricultural, post-industrial, post-informational U.S. economy went back to barter.
Not the old-fashioned payment-in-kind: You fix my roof, I’ll install your home entertainment center. Heck no.
Under the new system, General Electric pulls 4.6 million energy-saving 60-watt bulbs out of inventory, swaps them for a top-of-the-line Maybach 62S and presents it to CEO Jeff Immelt.
It’s a little more cumbersome than a deferred compensation plan, but at least the underground economy gets a lift.
Alternative (Energy) Bubble
The housing bubble may have been turbo-charged by the Federal Reserve’s easy money policy from 2003-2005, but all the ingredients were already in place, just waiting for a match to be struck.
Housing’s tax-advantaged status made homeownership more desirable and affordable. Government diktats, starting with the Community Reinvestment Act of 1977, pressured banks to lend to less-creditworthy borrowers in minority neighborhoods. Fannie Mae and Freddie Mac made affordable housing their mission.
Just as the housing bubble inflated on the heels of the tech boom-bust, an alternative-energy bubble began to take shape before the economy fully recovered from the 2008 recession.
The Obama administration provided all kinds of tax incentives for going green. Fed policy stayed too easy too long because Congress enacted a law requiring pre-approval for any policy actions that would raise the overnight benchmark rate.
If you print it, they will spend. The U.S. ended up with a lot of unused, portable solar panels, which folks took to wearing -- a big improvement over tin hats.
Xanax Nation vs. Panicked Nation
It’s said that there are no atheists in foxholes and no libertarians in financial crises. Still, many of the decisions made during the Panic of 2008 were hasty, ill-considered and left the nation with huge imbalances. (There’s no shortage of Monday-morning quarterbacks in the foxhole after the crisis.)
Consider Treasury Secretary Hank Paulson’s request for $700 billion from Congress, no questions asked. Or Congress’s rush to confirm Tim Geithner as Treasury secretary, even after he was exposed as a tax cheat. Or the seemingly arbitrary decisions on which institutions should live and which should die.
Panicked decisions are usually bad decisions because they’re driven by emotion. In retrospect, maybe it would have been better to give Sheila Bair the $700 billion and let the Federal Deposit Insurance Corp. figure it out.
So great were the repercussions from the Panic of 2008 and the Panic Fix that the federal government pressured the Food and Drug Administration to make Xanax, an anti-anxiety medication, an over-the-counter drug and to require all policy makers to take it during crisis times.
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