Chidem Kurdas
As the giant regulatory octopus reaches into every nook and cranny of American life, we should remember its track record. Here’s an example from my book, Ponzi Regulation:
“One rationale for financial regulation is to protect people against their own cognitive shortcomings. The 1990s and 2000s showed that reasoning to be false. As irrational elements played out, various arms of the federal government did nothing to moderate the wild expectations. …
The SEC did not try to make public company accounting more realistic—until after the bubble collapsed. In the meantime, the myth that it watches over markets fed the public’s confidence …
As for the Federal Reserve, it positively egged on the perky mood. The triple rate cut in 1998 confirmed the investing public’s belief in the “Greenspan put” and further spurred the market. Though afterwards officials denied that they could have stopped the bubble, at least they should not have encouraged the public’s bloated confidence.
The official defense is that the Fed was not sure there was a bubble, just as the SEC had no awareness of corporate accounting fraud. We should not take such protestations of ignorance at face value. If one somewhat crazed short seller, working by himself, could see the problems ahead of time, surely officials endowed with great authority and resources could have as well. …
It may be that government agents were caught up in the same misconceptions as the public—a modern version of the Master of the Mint debacle. Whether or not regulators acted the fool, the fact remains that in the 1990s the regulatory state failed signally to tamp down on a gigantic bout of deluded investing and the diverse shenanigans it spawned. …”
As for the first decade of the 2000s, the Fed pumped money while Washington’s creatures Fannie and Freddie underwrote the housing bubble. These policies strengthened tendencies toward deception and illusion.
Tags: Federal Reserve, Financial crisis, Securities and Exchange Commission
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