Friday, February 01, 2008

The economy & government regulation

The International Herald Tribune (owned by the NY Times Co.) sees a very serious recession coming, feels the Fed has done its best to cushion the downturn's effects, and advocates more government regulation as the proper response to what it calls "the excesses of the bubble years." [excerpt]

...In short, no matter what the Fed does, it will take time - certainly a period of retrenchment, and quite likely of recession - to work off the excesses of the bubble years. That means foreclosures and financial ruin for some, joblessness and belt-tightening for others, and less vibrant and less viable communities for many.

The damage, now becoming apparent, demands that policymakers take stock of how the economy arrived at this place. The bubbles in housing and mortgages would not have been possible were it not for the progressive deterioration in regulation over the past several decades, culminating for all practical purposes in a regulatory collapse during the Bush years. The anti-regulatory ethos, in turn, derived its potency from a pervasive ideology that markets are self-regulating and self-correcting and therefore best handled with incentives and voluntary best practices, rather than rules and boundaries.

The task of reinforcing the regulatory apparatus of the nation's economy is as formidable a challenge as managing the downturn, and ultimately of more lasting importance.
Some rules and boundaries are needed but we must be careful.

Wouldn't it be foolish for America to go in the direction of countries such as Germany and France with their highly government regulated economies just when those countries are realizing their "rules and boundaries" have led to chronically high unemployment and slow or no economic growth?

And isn't part of the current trouble with America's housing and mortgage markets ( which are fundamentally sound, by the way) the result of government pressure and "rules and boundaries?"

I'm thinking, for example, of the pressure in recent years that mortgage lenders came under when they said they didn't make certain loans because the applicants weren't credit-worthy.

That wasn't good enough for many political leaders and news organizations such as the NY Times who were sure racism was playing a big part in the rejection of certain mortgage applicants.

I wish those political leaders and news organizations had started their own mortgage lending companies. They could have loaned to whomever they wished, absorbing the risks, profits and losses.

MSM should be reporting now on those political leaders and news organizations who pressured mortgage lenders to make high-risk loans they didn't want to make.

The entire ITH editorial is here.