Friday, March 21, 2008

Party On Dude!

Krugman has a great piece up today explaining why 2008 is like 1929.

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.


Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.
I'll take Krugman one step forward. Whether it's transportation regulations (Southwest Airlines?), food inspection, financial regulation or any other sector of the economy, the Reagan revolution has left our country a victim of the excesses of the greed inherent in capitalism. And the extremes in any ideological approach to governing expose all of us to the excesses of our own humanity, and the unpleasant effects.

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