Making Markets…Be Markets?

I very much respect Mike Konczal, and regularly read his blog for very insightful analysis about how we can make the mechanics of finance work more effectively. Sure, he can overstep what I view to be necessary to make markets function optimally — and he jumps to a government solution pretty quickly, but most of what he says is seems cogent to me. However, he recently gave a talk at the Roosevelt Institute, which runs the blog New Deal 2.0 (a blog that isn’t always as objective or insightful as Rortybomb), with the subtitle “21st Century Glass-Steagall”, or something to that effect…and I got pretty worried.

Of course, readers of this blog will know that Glass-Steagall was a piece of legislation written by banking special interests, for banking special interests, and that the Peacora hearings were little more than sham show-trials intended to appease irrational populist outrage. And, perhaps, that there is no evidence anywhere in the world that the separation of commercial and investment banking creates a more robust financial system — indeed, evidence points to the opposite conclusion.

However, the talk is actually very good, and is misleadingly subtitled (I didn’t watch any of the other presentations), so it’s well worth the 10 minutes!

Now, Mike is obviously much smarter than I am when it comes to exotic finance…but I do have a few questions for him, if he happens to read this:

  • I think it is pretty clear that the structure, complexity, and confusion of regulation was a problem in the finance world, which is a government failure, and not just because the “wrong people” were governing. The world moves much quicker than the government can hope to; and the incentives of regulation are structured so that the game resembles something akin to a professional basketball team playing against a junior-varsity high school team. You mention that we need regulation to stop the spread of the toxic finance disease into other parts of the balance sheets of otherwise healthy institutions…but how do you propose to keep up? I know you are fairly “famous” for outlining and promoting “vanilla options” in finance; but in your opinion, is that the key, and then just leave the casino doors open?
  • A popular argument is that we need a dynamic, independent regulatory institution with the funding and wherewithal to act in real time to assess systemic risk, and judge consumer finance products on their safety (and efficacy?)– and that this is not something that can be done simply through the blunt force of legislation. Setting aside the fact that you’re a fan of the CFPA, I view a lot of your ideas as being ideally suited for legislation. Things like the “vanilla options” you outline, or requiring 20% loan-to-value on all residential mortgages (?). Things that will keep unwary consumers out of the casino. Which approach do you think is superior?
  • As you know, the timeline of the recession includes a garden-variety recession following an ongoing financial panic, with the very abrupt crash, and ensuing deterioration of market conditions that happened in Sept-Oct 2008. Do you view causality as running from [huge financial panic -> falling NGDP] or [falling NGDP -> huge financial panic]? If you take the former view, what historical and current evidence can you point to that causality runs in this direction?
  • I know you’ve spent a lot of time talking and writing about “Too Big to Fail”. Have you ever thought about the implications of the problem actually being “Too Brittle to Sustain“? (I’m not positing that TB2S is the actual problem, it’s just another way of looking at the situation…one that I find very interesting)

It is highly unlikely that Mike actually reads this blog, but if anyone else would like to answer, feel free! And again, wonderful presentation by Mr. Konczal, and keep up the good work on your blog!

[H/T Mark Thoma]

Further Reading: Arnold Kling comments on Raj Date’s presentation, which was about getting rid of Fannie and Freddie.

— — — —

P.S. This is the first time I had ever seen Mike, and he doesn’t fit how I had imagined him ;].

P.P.S. For anyone interested, here is the report from the conference. Sidenote: I have to admit that I feel kind of left out, because apparently everyone that hears Elizabeth Warren make the case for the CFPA finds it very compelling…and I don’t think her conclusions follow. Indeed, she seems to believe in magic (and a ton of rhetoric).


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