Nick wrote
>"Some of the causes of the depression that Posner cites are...the housing
^^^^^^
bubble...
I hope my pointing to causes worked out. I won't argue the point, I agree
with it. But, he's saying the housing bubble is a cause of the problem, not
an effect. Which I think, to first order, is the right place to put it.
And, I agree with what Brad said. But, what I did not see stated is that the
housing bubble is an effect of the crisis, rather its one of the causes.
One real difficulty with government regulations is that they can indeed be
straightjackets. Those of us who favor regulated markets, to be fully
intellectually honest, need to admit that regulations have often tended to
be Byzantine, and have been used as a tool to do dangerous things (like help
create the housing bubble in California).
But, at the same time, the repeated failure of the free market to handle fat
tails, let alone financial black swans shows that some regulation is needed.
After the stock market crash of 1929, the margin buying of stocks was
limited. Banks have long been required to keep a certain percentage of
capital in reserve. The two big financial messes that cost the government
hundreds of billions (the S&L fiasco and the latest mess) have both involved
regulators who didn't want to believe in regulation and violations of this
reserve requirement.
One simple way to handle this would be to enforce real reserve requirements
on all of these banks....and allow no fancy footwork to get out of them. I
would argue that it's simple, easy to understand, and would have, at the
very least, tremendously reduced the damage from the sub-prime crisis.
The only way (at least as far as I know....Brad can jump in with better
ideas) the Federal government had to reduce the housing bubble (short of
dictating housing prices by fiat) would have been to raise interest rates to
discourage the buying of houses. In California, it would have been much
simpler, the citizens could have stopped the concerted effort to
artificially raise housing prices by putting multiple roadblocks in front of
development of affordable housing.
Dan M.
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