Wrong Diagnosis, Bad Remedy

Chidem Kurdas

A consensus emerged after the 2008 election, which brought a Democrat to the White House and enhanced Democrats’ control of Congress. With regard to the financial crisis, a simple Democratic message, diligently echoed in the media, dominated political and policy making scenes. 

Insufficient government oversight was responsible; the solution was more regulation. So came about the mammoth Dodd-Frank Act of 2010, the multiple failings of which are showing up. Both the diagnosis and the remedy were wrong. From Ponzi Regulation:

“The notion, often expressed in the press, that deregulation caused the 2008 financial crisis confuses the behavior of government agents with their legal powers. Regulators choose not to apply or enforce certain laws and rules, using the vast discretion they possess. That the SEC chose not to stop Madoff or Stanford demonstrates the license such bureaucracies have to act or not, as they wish. It is not that the SEC lacked authority or tools to tackle the con men.

Another example is the Federal Reserve’s choice not to discourage the 1990s stock market bubble or 2000s credit bubble—by keeping interest rates unusually low for several years, as John Taylor showed. It is not that the Fed lacked the power to discourage market exuberance; the bureaucracy – or at least its higher echelon – decided not to.

Federal agencies have long possessed ample legal authority; that has not changed. But measures that are not to the bureaucrats’ liking or advantage get short shrift……”

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