Don't Trust the Regulators

By Klein, Ezra | Newsweek, April 12, 2010 | Go to article overview

Don't Trust the Regulators


Klein, Ezra, Newsweek


Byline: Ezra Klein

Financial reform can't be left to those who failed us before.

Here's my problem with the financial-regulation package that Sen. Chris Dodd has proposed: it hands the very regulators who failed us in 2005 and 2006 and 2007 and 2008 the responsibility for saving us next time. If you tried to work backward from the bill to an account of the meltdown that produced it, you'd come up with something like "We have a wise and brave class of regulators who did not have quite as much information or power as they needed to stop the financial crisis."

Anyone who remembers Alan Greens-pan and Ben Bernanke dismissing the housing bubble knows that's not quite right. But regulator failure is a fact of life, or at least of bubbles: it's pretty much in the definition of a bubble that the relevant regulators don't believe there is a bubble. Otherwise they'd pop it. The trick is building protections that work even when the people in charge don't realize they're needed.

The most successful example of this is federal deposit insurance. Be-fore the Great Depression, bank runs were an all-too-common occurrence. There were dozens in the years leading up to 1929. FDR's response wasn't to create a Commission on Bank Runs tasked with watching banks and stepping in to insure their deposits if they got into trouble. He insured all consumer deposits. It didn't matter whether the chairman of the Federal Reserve thought your bank was playing nice. Your money was safe even if he got it wrong.

If you want proof of how well it worked, ask yourself this: did you line up outside your bank to close your account after Lehman collapsed?

The corollary today is capital requirements. When Lehman went down, its leverage was at about 30:1. That means it had borrowed $30 for every dollar it had in assets. Leverage that high does a few things: First, it gives the bank more money to take risks, which banks like because it means higher profits. Second, it means that the bank has less money to pay back creditors if a bunch come calling at once, making failure more likely. Third, it means that if the bank does go down, it does more damage to the system be-cause there are more people counting on the bank's paying them back.

Keeping capital requirements at manageable levels is financial regulation's strongest tool. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Don't Trust the Regulators
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.