“Deregulation” and “short selling” are the two causes of the Wall Street crisis, at least if you listen to the talking heads on cable television.
And they are provably wrong.
Regulation of the stock markets has increased in the Bush years (remember Sarbanes-Oxley?) and Democratic critics can not cite a single regulation that they asked for that has not been improved.
Indeed, it was the government role in the mortgage business that ignited the crisis. Just as the Savings and Loan disaster of the early 1990s was caused by government intervention (in short, backing deposits of S&L’s while relieving them of consequences), so Fannie and Freddi Mac and the other government-sponsored enterprises were able to take excessive risks thanks to an implicit government backing. When you privatize the reward and nationalize the risk, you buy a world of trouble.
Indeed, we should use this crisis to end all government support for the GSEs. How is the tricky question…
Economist John Lott lays out a strong case that Fannie and Freddie Mac, in league with Bear Sterns and Countrywide, encouraged regulation that caused the current mess.
As for short selling, those talking heads are selling ignorance. People can only sell short when others want to buy–and people only buy shorted stocks when they think that they will go up and thereby make them money. What enables a sale to occur is when two people place different values on a good. If they agreed, there would be no sales. So short selling simply moves stocks from people who believe the stock will plunge to people who believe it will rise. Short term that is bad news for the banks whose stocks have been shorted–their market caps will shrink. But the buyers of those shorted bank stocks are betting that their values will return to normal over the next weeks and months–and they are probably right.
Bottom line: short selling occurs based on information and trendlines that leads some to sell and some to buy. It doesn’t cause downturns (information does), but creates a way for solid companies to rebound.
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3 Comments
1. Bob H:Thanks. This was an excellent discussion of what caused the current problems.
Sep 19, 2008 - 10:56 am 2. GOOGLE: OBAMA AND ACORN:Why wasn’t Obama vetted?
The DNC and biased media “selected” Barack Hussein Obama — he was not “elected” by the people. During the primaries, he hired lawyers to stop the votes in Florida and Michigan. What’s his next typical ‘Chicago-Mobster’ step?
For the past 2 years, the Democratic leadership, including NANCY PELOSI, HARRY REID, AND BARACK OBAMA, has pulled all sorts of strings to make the American people believe that the economy was collapsing.
THEY HAVE NOT PASSED UP ANY OPPORTUNITY TO “HURT” THE ECONOMY IN ORDER TO MAKE THEIR POINT.
Refusing to take common sense steps to keep oil and gasoline prices low is just one thing the Democratically-controlled Congress has done to hurt the economy.
We are now sending several billion dollars each and every day overseas. Our money is employing foreign workers to drill, pump, refine, and transport oil, instead of employing American workers to do those same jobs.
Who in their right mind would question the impact this currency drain is having? Higher gas prices make it more difficult to meet one’s home mortgage payments. And defaulting on Mortgages in part has brought on the current crisis.
Fannie Mae and Freddie Mac lobbyists contributed mightily to the Dems. Obama was the #2 recipient of these contributions! The CEO’s and top officers walked away with millions.
So should some of the fault of our current Wall Street Crisis be laid at the feet of PELOSI, REID, OBAMA, and their other liberal Democratic friends?
WITHOUT A DOUBT IT SHOULD!
WE NEED TO REPLACE ALL DO-NOTHING DEMS IN CONGRESS!
I’M VOTING FOR JOHN McCAIN IN NOVEMBER!
Sep 19, 2008 - 7:17 pm 3. James Wang:I agree completely—especially given the fact that GSEs are basically expected to be risk-free given the government (as we see now) are implicitly guaranteeing their perfect safety—though I’d also point to another aspect that caused this entire mess.
We’ve been trying to put a regulatory framework on these banks and institutions for quite a few years now, and one of the first that started driving banks into these complex derivatives and whatnot were the Basil requirements instituted in 1988.
Then, Basil II, SOX, etc only accentuated the move towards financial instruments that were extremely risky but “off-balance-sheet” so they wouldn’t have to leave reserve requirements for them. The problem with expecting them to not to this though, is rather stupid, as banks go uncompetitive if they just let their money sit around without gaining more returns than other banks who are competing with them (and will outcompete/buy them out if stronger).
I’d argue that those regulations—PLUS the current deregulation, which loosed the last floodgates on all-out pursuit of these instruments that previous regulation forced upon banks triggered in the first place—is what caused the crisis.
Basically, in essence, we made traditional, safe investments extremely unattractive and somehow expected banks to not spin off into risky investments that, even with the risk, are now more profitable.
I also have a more complete write-up of all of these ideas here:
Oct 4, 2008 - 9:07 pmhttp://depolitik.com/2008/10/04/why-lawmakers-and-experts-are-wrong-about-the-financial-crisis/